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Why the 'disconnect' between the economy and your 401(k) could persist

November 1, 2009 | 11:42 am

The stock market has a serious lot working against it at the moment: fresh doubts about the economic recovery, a rebounding dollar and the general sense that share prices are overdue for a pullback after a nearly eight-month-long advance.

Including Friday's slump, the Standard & Poor's 500 index is off 5.6% from its one-year high reached Oct. 19, and talk of a bigger drop is rampant (again).

But if institutional investors remain reluctant to sell equities, it's because they see that plenty of companies are looking better than the U.S. economy as a whole.

How is that possible? In my weekend column in the Times, I note how corporate balance sheets have improved this year thanks in part to the plunge in long-term borrowing costs -- which has been abetted by small investors' ravenous demand for bonds.

Wall Street also can't ignore the turnaround in corporate earnings, even though the bottom line has been fattened largely because of vicious cost-cutting at workers' expense.

Why is the U.S. still losing jobs? As economist Allen Sinai put it: Companies are "making good money without people."

That isn't a path to long-term prosperity, but remember: Many major American businesses (the kind you probably own in your 401[k]) are betting on faster growth abroad than at home, anyway. And their biggest investors, for the most part, don't care where in the world they make money, as long as they make it.

I also note in the column that, as long as doubts persist that the U.S. economic recovery can sustain itself, the Federal Reserve (which meets this week) will remain in a supporting role with near-zero short-term interest rates.

And with "cash" investments paying nothing, and long-term bond yields low, it's that much harder for investors to bail on stocks en masse.

So, could the market pull back further this month? No question. That would surprise virtually no one.

But could we face another crash that obliterates your 401(k)? Highly unlikely in the near term.

Read the full column here.

-- Tom Petruno