One would expect that there would be certain factors that should correlate with a strong stock market. Low unemployment certainly would be one. Strong economic growth would be another. Finally, a manageable debt and deficit should be fundamentally important. After all, we would normally think of the stock market as a reasonable barometer of how things are going. Sounds reasonable, right?
OK, so our stock market indexes have soared on a four-year run, which is one of the great bull markets in our history. The big question is why?
Consider this. Labor participation rate (the percentage of the working population employed or looking for work) is near a 35-year low. The frequently reported unemployment rate is the U-3, one of six measures (U-1 though U-6) reported by the Bureau of Labor statistics, and does not count people who have stopped looking for work, so-called “discouraged” workers. In that sense, the labor participation rate is more reflective of “real” unemployment.
Gross Domestic Product growth is anemic to nonexistent, depending how one measures it. We are at record debt levels, about $17 trillion, and deficits are slowly decreasing off all-time highs. So, what’s driving the stock market?
When people balance their investment portfolios, they usually have a variety of investment vehicles, from virtually zero risk (cash), to relatively safe (bonds) to higher risk (stocks). Ben Bernanke, putting unprecedented downward pressure on interest rates by buying the vast majority of government securities as of late, has obliterated return on fixed income investments such as money markets, bonds and savings accounts.
The people who cannot stand to see their money sit idly, which includes most people, have put that money into stocks. Money rushes into stocks and they go up, regardless of the state of the economy. Rick Santelli of CNBC aptly calls this phenomenon “squeezing the water balloon,” another way of saying the creation of a bubble.
It was recently reported that household wealth grew $3 trillion in the first quarter of 2013. This seems incongruous with a reported GDP growth of 1.7 percent. Hang on to your hats when Uncle Ben or his successor start to slow down the printing presses.