People ask me why the stock market keeps going up, in an economy that is far from buoyant. Here is a CNBC article which poses the same question. In my view, today's rising stock prices do not reflect an anticipation of higher corporate earnings.
My response all along is that there is no mystery, the Fed is to blame. For some years the Federal Reserve Bank has artificially suppressed interest rates in order to stimulate the economy. Has it helped? We'll never be certain.
Adjusting returns for the low but constant rate of inflation, Treasury notes and bonds pay essentially zero. In other words they are a safe place to "park" money but are not a place where money can be earned. Ditto savings accounts and CDs, all three are hardly better than under the mattress.
Meanwhile, because employment has been very weak (see yesterday's post on jobs data) and wages have been flat, home sales have been anemic and thus in many markets real estate prices have not risen much.
Therefore, of the three major places where money can earn a return - lending, real estate, and equities - it turns out equities or stocks are the only one with earnings potential. Thus most of the money that would normally be spread across bonds, stocks, and real estate is being funneled into the stock market, increasing demand.
In today's economy corporations do not issue huge new amounts of stock because they don't have good places to invest the funds they already have on hand. This reluctance restricts supply of equities.
Rising stock prices are the result of more dollars chasing a given pool of stocks because of a perception that there's no other sensible place to invest. Increased demand for a restricted supply equals rising prices. This is not rocket science, it's the "dismal science" of economics.
