stock market

Why The Stock Market Is Booming While The Economy’s Still Slow

Stock market jitters have presidential candidates Trump and Cruz predicting a crash. Here’s why.

As the International Monetary Fund (IMF) lowers global growth projections, stock markets are near all-time records.  The disparity between the two has contributed to worries that the markets are about to tumble.

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Stock market, 1900 to present

Despite a healthy looking chart, presidential contender Donald Trump claims that America is on track for “a very massive recession“, while Ted Cruz says “a crash will be coming”. Both blame the US Federal Reserve and its easy money policy for boosting the stock market to unrealistic levels.

Why is the stock market performing so well?

  • Quantitative easing. Across the world, central bank’s policy of buying billions of dollars of bonds each month has lowered profit margins on bonds, meaning investors and companies seeking profit are driven towards stocks. It also leads to a temporary surplus of money in the economy.[contextly_auto_sidebar id=”sg0pzWUrUAily6dAMLOBhFZg16UAb9UF”]

  • Low interest rates.  Central banks have dropped interest rates to unprecedented lows as they try to encourage investment and reduce savings.  Savers trying to get a decent yield have little choice but to accept more risky investments. Japan actually has a negative interest rate for savers.
  • Record profits. Corporate profits are unusually high, as firms cut down wages and jobs but maintain the same output because of productivity gains. This means it’s a good time to own corporate stocks.

  • Cash hoards. Companies are also holding more cash than ever, which is allowing stock buybacks that encourage the market.

What will happen next?

While it is possible that the market crash, many economists see it as an unlikely event. It’s more likely, analysts say, that we will see a smaller correction to a bust cycle, instead of a dramatic crash – which won’t necessarily lead to an economic downturn.

Ultimately, there seem to be a few important indicators to watch out for, including (strangely enough) black swan events caused by people overestimating the likelihood of a crash.  Other signs to watch out for are rapid swings in commodity prices, defaults in emerging-market corporate corporate debt (bonds), and currency devaluations.

But for now, unless a major event happens, it seems the stock market will keep booming ahead of the rest of the economy.

Updated. Cover photo courtesy of Baer Tierkel via Flickr.

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Ole Skaar