Crowd-sourcing question: Why is the stock market still going up?

I understand that the Dow Jones average consists of a very cherried-up bunch of stocks.  Nevertheless, it usually is at least somewhat tied to what’s going on in the real world.  That doesn’t seem to be true lately.

In the face of Middle Eastern instability; Iran being months away from having a nuclear bomb; a stagflation economy; a potential shutdown and, if Obama ignores the 14th Amendment, a default; and the Obamacare exchange’s disastrous, with all the future trouble that portends, the stock market keeps going up.  That seems very counterintuitive.

I have to believe that what’s going on with the stock market now is a bubble.  After all, because a stagnant job market, a weak economy, and unstable national security are all inconsistent with a strong, healthy market.  Add in the fact that the constantly-changing Obamacare rules, regulations, and crony exemptions keep employers and investors befuddled and cautious, there should be no reason for the market to rise.  And yet it’s rising. . . .

My question is twofold, I guess:  Am I right that this is a bubble?  And if I’m right, what the heck is causing it?  Nothing I look at today signals to me that investors should be cheerful and optimistic.

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Comments

  1. says

    A big part of it is the perceived absence of alternatives. Someone (and “someone” may be a pension fund, not necessarily an individual) gets tired of almost-nonexistent yields on money market accounts and 2.75% yields on 10-year Treasuries, and decides that maybe the 4.74% yield on Glaxo Smith Kline looks pretty good, or even that the odds on a bit Twitter run-up, in the wake of the forthcoming IPO, are good enough to justify the risks.

    The real question is valuation. Even with “a stagnant job market, a weak economy, and unstable national security (and all the other bad things), if the market was priced low enough, it would still represent a valid buying opportunity and it would make sense for it to rise. I personally think the overall market is somewhat overvalued, though there are pockets of reasonable valuation. John Hussman, of Hussman Funds, is a good thinker on these matters:
    http://www.hussmanfunds.com/

  2. jj says

    It’s a bubble.  The reason is that money is being endlessly printed.  It has to go somewhere, you can’t just paper the bathroom with it (though that’s, in reality, about what it’s good for).  So as a big financial institution, what do you do with it?  Stick it in the bank?  No…  Buy bonds?  Already doing that out the wazoo – and making nothing, so no…  Go to Las Vegas?  Well, Jugears doesn’t like that, so no…  So you stick it in the market.  You have a shot at a decent return there, it feeds on itself.  The more money pumped in the better it does.  It might even stay ahead of inflation – for a while, anyway, once that seriously starts to hit.  The money is pumped into the market, so the market is flying, because there is nowhere else for it to go.
     
    That’s horrendously oversimplified, but it’s essentially correct.  You ask a simple question, so you get a simple – and incidentally accurate in its fundamentals – answer.

  3. Caped Crusader says

    jj beat me to it — money, honey, wwwaaaaaaayyy toooooo much!
     
     
    http://www.youtube.com/watch?v=dOZSK4aTjrE
     
     
     
     
    “Money Honey”

    (J. Stone)
    You know, the landlord rang my front door bell.
    I let it ring for a long, long spell.
    I went to the window,
    I peeped through the blind,
    And asked him to tell me what’s on his mind.
    He said,

    Money, honey.
    Money, honey.
    Money, honey, if you want to get along with me.

    Well, I screamed and I hollered,
    I was so hard-pressed.
    I called the woman that I loved the best.
    I finally got my baby about half past three,
    She said I’d like to know what you want with me.
    I said,

    Money, honey.
    Money, honey.
    Money, honey,
    If you want to get along with me.

    Well, I said tell me baby, what’s wrong with you?
    From this day on our romance is through
    I said, tell me baby, face to face
    How could another man take my place?
    She said,

    Money, honey.
    Money, honey.
    Money, honey,
    If you want to get a long with me.

    Well, I’ve learned my lesson and now I know
    The sun may shine and the winds may blow.
    The women may come and the women may go,
    But before I say I love you so,
    I want

    Money, honey.
    Money, honey.
    Money, honey,
    If you want to get along with me.

  4. says

    Also, fund managers are usually judged on *relative* performance…so if your competitive funds get a return of 9.8% this year, and you played it safe but only got 5.2%, it will likely turn out that “safe” wasn’t really all that safe in terms of your own career.

  5. Wolf Howling says

    David and JJ are right. This is a bubble created by the Fed and their QE policy of printing an additional trillion dollars a year while keeping interest rates at rock bottom levels.  Among other things, it allows the biggest players to leverage, earning the difference between minimal interest rates and the return they are able to make by investing the money in stocks.  It is a massive bubble – one that the left is using to keep up the appearance of an economy recovering from the housing bubble the left created.  The crash will likely be double edged – a stock market crash when interest rates rise and inflation from a money supply vastly outstripping the value of GDP.     

  6. JKB says

    It’s not all the money machine.  A lot of our confusion is that most of us are applying economics lessons we learned long ago to a system that no longer works that way and hasn’t for 20-30 years.  I doubt most high school and undergrad economic courses have been updated either.  
     
    This post, not right on point as it is about banking, put me to this thought.  I read economic blogs and sometimes see this.  But really, even the professors are behind, you have to read the current market participants and the ones who are really operating in the new environment aren’t really blogging, at least without a subscription.
     
    coyoteblog…trying-to-overcome-my-ignorance-on-the-banking-system.html

  7. says

    Most people go with the flow. So a Democrat with enough money can manipulate the market so that the lemmings follow along, since they see a huge uppeward creep in long term trends.
     
    Then the Democrat just pulls out his money and that particular stock starts crashing as everybody tries to get off the ship with most of their shirt.
     
    Given that Democrat pols have insider information from Congress, and that leaks out to certain “groups”, they have relatively confident they can crash a stock and get their profits. This is a kind of redistribution of wealth which you don’t hear about.

  8. says

    I asked this question of an economist/stock broker friend of mine a while ago and got the same answer as those above.  Ben Bernanke of Goldman Sachs is basically doing what benefits Goldman Sachs. They are a stock broking outfit and not a banking outfit so they like it when money is forced into the market by pathetically low interest rates.
    What looks like growth is not.  It is the net increase of money that would have been in safer investments and paying for retirement, college tuition and anything else that savers put money into.  These people are being forced into an under-performing corporate market where they are no longer creditors but shareholders and are no longer protected if these corporations stop paying out shares or go bankrupt.
    The system is now biased against savings and even savings institutions. Capital formation is extremely difficult under these conditions creating a greater vacuum for the government. Like it was said above by Ymarsakar this is a form of confiscation.

  9. Danny Lemieux says

    Another factor at work is that, with very low interest rates, companies can boost their stock value by buying back their shares using cheap debt capital.

  10. says

    Danny, sounds like an open invitation to hostile take overs. Although with the Democrats nationalizing Republican businesses and giving it to Democrats, that’s a solid alternative to a hostile take over.

  11. says

    A well-written and very interesting book on banking, and the regulation thereof, is Bull by the Horns, by former FDIC head Sheila Bair. She doesn’t pull a lot of punches, and is especially negative on Timothy Geithner and former Citgroup head Vikram Pandit, neither of whom is likely to be inviting Ms Bair to any parties anytime soon.

  12. jhstuart says

    As one who is an active trader I have a number of concerns: 1) the market responds positively when Bernanke’s replacement commits to the continuation of QE policies, 2) the market responds positively when Congress raises the debt ceiling. Neither of these are good for the country and portend for a sizable correction in the market.

  13. nathan says

    As you know from a previous comment I am a long term investor with an eye toward treating my share holdings as bond equivalents.  The longer my holding period, the higher the yield on my original cost.  At this point there is hardly anything with a yield-on-cost of less than 10 percent and in some cases it is well over 20-25 percent.  But prices don’t rise sharply with impunity.  I just sold all of my Blackstone for a quick gain of over 50 percent.  Those gains are now rolled over into a much safer situation – a publicly traded stock which owns enormous amounts of energy whose value is not reflected in the share price.  A nice piece of “real estate” that is an inflation hedge and a good place to hide out.

  14. Simplemind says

    Bubble.
    Banks borrow for free from the Fed. Rather than loan money to say, would be home owners who probably are buying more than they can afford and will get laid off anyway, they go to the stock market. Why, because every other bank is also, thus driving up prices of stocks. Its a circle that is powered by free money.  Of course, there is no such thing as a free lunch. Things that cant continue won’t.

  15. raincityjazz says

    Bubble, QE, plus some flitteryjittering by some big money parties.  It can’t last, and it won’t. I agree with the advice to invest in precious metals of whatever calibers fit your own stash of 2nd Amendment goods.

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