Readers of my blog know I generally feel that supply and demand is driving the stock market and not economic fundamentals. There are only a finite number of stocks available, so if more money gets invested, the market generally goes up. Money comes out, stocks go down. The one thing I didn’t consider is the impact of the baby boomer generation. A recent article pointed this out and I kick myself for not realizing this since I am a baby boomer myself!
I wrote my post I’m all in…get ready for the big correction! about six months ago. The S&P 500 Index stood at at 1,883.95 then. Right now, its sitting at 2,031.95, an 8% increase. With a 8% cushion, I feel pretty good that I can survive a 5% drop and even a 10% at this point would be palatable. I already had to endure two sharp downturns, one that took me about 20 points below my starting point–that wasn’t fun. Still, I kept to my guns and felt that there was no fundamental reason for stocks to hold their lows and, sure enough, the markets bounced right back.
This all brings me to the point of this post. I can handle a reasonably large correction because I got in. You can’t do this if you sit on the sidelines waiting. The doom and gloomers are going to be right…someday. They will be gloating with a big I told you so. What they won’t mention is the gains the market had while they spouted off their doomsday predictions. Personally, I want to be sitting on a big gain to weather the storm. Heck, if we can come back from 2008, we can come back from anything!
Interesting article supporting my view that the markets are climbing due to inflow of money. Basically, more dollars chasing a fixed amount of stock shares equals higher prices. Some takeaways:
“monetary policy is testing its outer limits,” and that advanced economies, including the U.S., need “balance sheet repair and structural reform.” (Me: Our government is too self-serving to do what is needed.)
near-zero rates are no longer effective in rallying the economy, they have sent investors into equities. (Me: Yup. This is why the markets are at all time highs despite weak economy.)
“market participants are pricing in hardly any risks … a powerful and pervasive search for yield has gathered” (Me: Investors are being driven to stocks because you can’t get any return on CDs, etc.)
Currently, monetary easing happens too quickly during busts, and governments need to find ways to make the policy counteract the financial cycle so it does not exacerbate existing problems or add new ones. (Seems unlikely this will happen. Too unpopular.)
None of this is really new or a revelation. For stock market investors, the thing to watch out for is the time when the recent high-return-seeking investors get scared and pull all of their money out of the market. I think they have some stomach for small drops, but if we see a quick steep drop, it will be accelerated as funds are quickly pulled. I know I’ve got my finger on that trigger!
The stock market is kind of like eBay. If there are a whole bunch of people bidding in the same auction, the final price will generally be higher than if there were just a few bidders. By the same token, if more money is invested in stocks, overall prices increases. It’s the law of supply and demand. (For more on this, see my post here)
I like this state of things. We’ve got a market that’s performing well despite analysts’ pessimism. We continue to get relatively positive news on the employment and economy fronts. This combined with the higher returns on stocks has got to be convincing more folks to invest in stocks, thereby driving up prices even more. Obviously there will be a sell-off at some point, but that’s just something you live with. Long-term, you should be better off.
WARNING: Let me preface this blog post by saying that although I am a CPA, I am not a professional investor nor adviser. You should take all of this post with a huge grain of salt :-)
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I have always wondered why the three major stock market indices (DOW, S&P and NASDAQ) always move in concert with each other, generally moving up and down in unison. How is this possible when each has a unique group of stocks? Aren’t there masses of stock pickers buying/selling individual stocks? It just doesn’t make sense…or does it?
Now, if you read the market news, it will say the markets went down because of blah blah blah and the next day the markets rebound because investors ignored blah blah blah. Why would, say, good news for the housing market make the tech-heavy NASDAQ rise? Read more
Well, I’ve been sitting on the investing sidelines for several years and have finally decided its time. Time to move some cash into equities. Now, despite the fact that the government has merely allowed the proverbial can to be kicked farther down the road, one cannot argue that stocks have continued to rise with no end in sight. Are they due for another correction? Sure, but my investment timeline is long enough that I should be able to absorb it. I’m hoping I can get enough gains in before that happens. Read more