With Economy So Bad, Why Are Stocks Up?
With Economy So Bad, Why Are Stocks Up?
People expect stocks to rise if the economy is improving and drop if it’s getting worse. But that idea is wrong. So rather than feel confused because stocks are going up as the economy plunges into Great Depression territory, I keep investing in stock index funds every month — regardless of what the market is doing.
Conversely, a shrinking economy should send stocks down because a company’s share of that shrinking pie will mean lower sales — which will cause the company to burn through cash (a result that can be made less bad through layoffs). The Economy Is Getting Worse, Yet Stocks Are Rising. Based on this theory, it stands to reason that stocks should keep plunging.
After all, on May 8 the Department of Labor reported that the U.S. hit a record unemployment rate of 14.7%, according to the Wall Street Journal. The actual economic misery is even worse because millions have stopped looking for a job, according to MarketPlace — a reality not reflected in the unemployment rate.
The economy is shrinking and likely to continue to do so. That’s because some 70% of economic growth comes from consumer spending — which dropped a record 7.5% in March — and April’s results are likely to be even worse.
This could empower a vicious cycle in which a deeper drop in spending results in more excess capacity at companies which layoff more employees and further reduce consumer spending.
Indeed, Moody’s Analytics said April 8 that it did not expect the U.S. to make up all the jobs it has currently lost until 2023, according to the New York Times NYT .
Yet the S&P 500 — while down 10% since the beginning of the year — has rebounded 31% from its March 23 low.
Stocks move up when the biggest volume traders are net buyers and fall when they’re net sellers. By net buyers I mean that traders who want to buy are more eager than sellers are to sell, so the market will only clear if the buyers agree to pay a higher price. Net sellers means that the market can only clear if the price drops because of the prevailing pressure to sell stocks. This theory would be useful if anyone besides the high volume traders themselves knew whether they were planning to sell or buy and the reasons for that bet. Unfortunately, that is not possible.
Always remember that government intervention has made almost everybody a net purchaser of stocks via compulsory (or nearly compulsory) investment schemes like 401K (US, JPN), Superannuation (Aus), Kiwisaver (NZ), Pension Plans (EUR, UK) and so on. These schemes render almost useless traditional analysis of stocks where investors actually have a choice of whether to invest in stocks or not by redirecting a significant portion of the nations wage bill directly into stock markets. Large amounts of money are hard to move around, and the contributors cannot get their money back for decades.... these factors limit transfer of money from one market to another; net effect is stocks tend to rise, regardless of the state of the economy.
Theres also the "hunt for yield" to consider; in order to have the money not lose out to inflation its better to invest in *anything* with a better yield, which has the effect of driving money into higher yield markets like stocks, bidding the price up (which lowers yield overall, but its better than a guaranteed loss)
But, hey, we gotta pay for the baby boomer retirements somehow....
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With Economy So Bad, Why Are Stocks Up?
People expect stocks to rise if the economy is improving and drop if it’s getting worse. But that idea is wrong. So rather than feel confused because stocks are going up as the economy plunges into Great Depression territory, I keep investing in stock index funds every month — regardless of what the market is doing.
Conversely, a shrinking economy should send stocks down because a company’s share of that shrinking pie will mean lower sales — which will cause the company to burn through cash (a result that can be made less bad through layoffs). The Economy Is Getting Worse, Yet Stocks Are Rising. Based on this theory, it stands to reason that stocks should keep plunging.
After all, on May 8 the Department of Labor reported that the U.S. hit a record unemployment rate of 14.7%, according to the Wall Street Journal. The actual economic misery is even worse because millions have stopped looking for a job, according to MarketPlace — a reality not reflected in the unemployment rate.
The economy is shrinking and likely to continue to do so. That’s because some 70% of economic growth comes from consumer spending — which dropped a record 7.5% in March — and April’s results are likely to be even worse.
This could empower a vicious cycle in which a deeper drop in spending results in more excess capacity at companies which layoff more employees and further reduce consumer spending.
Indeed, Moody’s Analytics said April 8 that it did not expect the U.S. to make up all the jobs it has currently lost until 2023, according to the New York Times NYT .
Yet the S&P 500 — while down 10% since the beginning of the year — has rebounded 31% from its March 23 low.
Stocks move up when the biggest volume traders are net buyers and fall when they’re net sellers. By net buyers I mean that traders who want to buy are more eager than sellers are to sell, so the market will only clear if the buyers agree to pay a higher price. Net sellers means that the market can only clear if the price drops because of the prevailing pressure to sell stocks. This theory would be useful if anyone besides the high volume traders themselves knew whether they were planning to sell or buy and the reasons for that bet. Unfortunately, that is not possible.
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