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Bruce Bartlett on Sarbanes-Oxley and the Stock Market on NRO Financial

Bruce Bartlett on Sarbanes-Oxley and the Stock Market on NRO Financial

by Rick Turoczy on August 13, 2005

The latest jobs report shows that the real economy is strong and growing impressively. But there are continuing weaknesses in the financial sector that are worrisome and could drag the real economy down unless addressed.

One area of concern is the stock market. Since the beginning of last year, the Dow Jones Industrial Average has basically been flat. It moves up and down within a narrow range and has never been able to sustain an upward trend. Shockingly, the Dow is no higher today than it was six years ago and is still below its 2000 peak.

Given the state of the economy and relatively robust corporate profits, one would expect the stock market to be higher. One reason it may not be is that traders are implicitly discounting corporate profits to account for some risk factor. It would be the flip side of the argument that was often made during the 1990s stock market boom that there had been a decline in risk that justified higher price/earnings ratios than existed historically.

I believe that one factor holding back the market may be the Sarbanes-Oxley legislation, enacted in 2002 as a knee-jerk reaction to the corporate scandals of Enron, WorldCom, and others. Reports suggest that the cost of this legislation is extremely high just in terms of out-of-pocket expenses. But the intangible costs could be far, far higher.

Bruce Bartlett on Sarbanes-Oxley and the Stock Market on NRO Financial

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