The stock market keeps edging higher, as I write this the DJIA is over 17,000, a near-record high. Market rises are supposed to reflect underlying optimism about the economy, this one may not.
What I believe is happening is a Fed-driven market bubble. Bonds are paying less-than-inflation returns, and real estate has not rebounded in most markets. By holding interest rates down to near-zero levels, the Federal Reserve Bank forces people who have money to put to work to buy equities: stocks and stock-equivalents like ETFs.
Meanwhile, firms with excess cash on their balance sheets are not issuing new stock as they have more capital than they need. In fact not a few are buying up their own stock, further reducing supply while being "the only game in town" drives up demand for stocks. Ergo, the equities market experiences a Fed-driven bubble.
The only question is when the Fed will stop the various QEs, quantitative easings? So far it shows no particular appetite to do so. If it doesn't, can the bubble burst on its own? My guess: no, but I'm not betting the farm on that guess.
