9/29/2017
Stock markets in the US reached record highs as the economy continues to grow. The markets continue the trend that began in 2009 under President Obama.
Despite a presidency which has seen its share of social turmoil, the stock market continues it’s surge upward. Does a president control the market? In truth, not much. Established economic policies and business failures have much more to do with what the market does than what a president does. The crash of 2008 wasn’t caused by George Bush as much as lax lending policies and insurance company abuses. And while Obama took important steps to lessen the damage and speed the recovery, the market wanted to recover. But the real story of today’s stock growth may be due to two other factors.
First, despite Trumps claims of unemployment rates as high as 42% (see this clip: Trump has no clue what the unemployment rate is) , it is nearing full employment, meaning that there is a whole lot of people with jobs right now. As more and more people are employed, more and more people contribute to their retirement plans. And what are the biggest investments inside retirement plans? Mutual funds, which almost all of them only buy stocks. The lower unemployment rate causes the stock market to go up because more retirement plans are buying stock.
Second, bond rates are low. Really, really low. This means that investors who want more that 1-2% return on their money need to look somewhere else besides bonds. The natural choice is the stock market, which offers easy entry, and for the past eight years a very good return. Low bond yields make stocks more attractive to many investors.
So with more people contributing to their retirement plans, and low bond yields not being so attractive, the stock market has seen a lot of buying.
Will this trend continue? Historically, there is a pull back of about 20-25% every 8-10 years, and we are due. In the short term, insurance companies may need to start selling some of their positions to fund claims caused by the recent hurricanes. But the biggest factor may be if the economy starts to see significant inflation. If inflation becomes a concern, then the Federal Reserve will raise interest rates to slow the economy. Higher interest means higher bond yields, and bonds will become more attractive than stocks to some investors. Nobody can predict where the market will be in 2-3 months, but today their is a lot of happiness on Wall Street.
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