Why Is the Stock Market So Strong?
Since last March the Federal Reserve has been elevating its target rate — with fantastic abandon.
Across that same frame it has been chewing into its balance sheet.
Meantime, the bond market is putting out the loudest recession warnings since 1982.
Wobbles to the banking system have likewise clouded the economic outlook.
It is a formula toxic to the stock market.
That is, in theory it is a formula toxic to the stock market.
Yet the stock market has ventured upon a lovely spree since October last.
It has climbed its wall of worry.
The S&P 500 has not absorbed even a 3% trimming since March.
This tranquil stretch is among the longest since 1928.
To what do we owe this splendid stock market levitation?
The AI Theory
Is the stock market spreeing because investors have have gone delirious over the artificial intelligence mania — and are shoveling up stocks that touch it?
There is evidence in back of the theory.
The “Big 7” — Amazon, Apple, Microsoft, Google, Tesla, Facebook and Nvidia — account for nearly all market gains this year.
In particular, three of these draft horses have hauled the bulk of the freight. They have taken the broader market in tow… and dragged it along.
Without them the S&P 500 would have scarcely budged a jot this year.
Observes money man Mr. Doug Kass:
Affirms Mr. Lance Roberts of Real Investment Advice:
There is therefore justice in the artificial intelligence theory of market superperformance.
We hazard investors will one day pile out of these stocks as rapidly as they piled in. But that is for another day.
Here is the central question: Does the Artificial Intelligence fixation fully and completely explain the market joy?
Living off Monetary and Fiscal Fat
Perhaps it is because the stock market — and the economy itself — feed yet off the monetary and fiscal fat whipped into existence these past few years?
This monetary liquidity yet lubricates the economic and financial apparatus.
It has not been wrung from the system — despite the consecrated and frantic efforts of the Federal Reserve.
The Federal Reserve has been chasing after the inflation it helped turn loose upon the United States.
Yet until recently it has lagged far behind inflation… and so its tightenings were merely attempted tightenings, failed tightenings.
In real terms — in real terms — the Federal Reserve was more accommodating than restricting.
Explains Mr. Keith Wade, chief economist with asset management firm Schroders:
There you have the monetary facet. What about the fiscal facet?
The Inflation “Reduction” Act
Recall, the government of the United States went amok during the pandemic year of 2020.
The geysers of money it blasted into economic circulation staggered the sober senses and outraged the conscience.
The government of the United States remains amok in 2023. And it still has the geysers going.
Here the abovesaid Roberts cites the Inflation Reduction Act, so-called. The abomination is another source of market liquidity:
Thus this liquidity — ultimately counterfeit liquidity — may heavily explain the stock market’s energetic romps this year.
We hazard the artificial intelligence theory lags behind the liquidity theory.
Mr. Larry Berman is the co-founder of both ETF Capital Management and Quintessence Wealth. From whom:
We are with him.
The Fuse Is Lit
Yet we would remind the stock market enthusiasts that policy — monetary policy at least — runs to a lagging schedule.
The fuse may burn 18 months or more before the detonation. It is that long.
The Federal Reserve sparked the fuse last March… 16 months distant.
Thus the fuse is burning.
Not only is it burning — it is very far along. How much fuse remains is a matter of speculation.
We concede the possibility that the bomb itself will fail to detonate. It may indeed prove a dud… and the stock market may continue its spree.
Past bombs with burning fuses have failed to detonate, it is true.
Yet are you willing to place that wager?
Are you willing to hold the bomb in your hands?
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