Monday, May 11, 2015

Stocks are the only game in town

A question that people have asked me quite often over the past few years is this: “If the economy is still weak from the recession, then why is the stock market so high?”

It’s a legitimate thing to ask. In October of 2007 the Dow reached what was then an all-time high of 14,164. During the Great Recession, the market bottomed out in March of 2009 at 6,547. Since then, we’ve more than made up ground and continually set new records; as I write this column, the Dow is at a once unfathomable 18,070.

No one would have expected the Dow to double - let alone almost triple -- in a half-dozen years. It doesn’t match what has really happened in the economy.

Most Americans are just as pained and worried as they were during the Recession. Such is to be expected when full employment has languished --- millions have taken part-time jobs while millions more have dropped out of the workforce due to a lack of opportunity. Taking into consideration those individuals through the U6 unemployment rate, true unemployment is really at 11 percent.

The US economy can’t keep those folks employed because it is just limping along – it has yet to surpass 2.5 percent annual growth in any of the past five years.

You can see why people are confused by the inverse relationship between economic indicators and the Dow.
So, what does account for the stock market’s ascension?

The answer is simple. It’s the only game in town.

It used to be that the working man could plan for his future by dabbling in one or more of the following: investing in the stock market, buying real estate, acquiring government debt, or buying certificates of deposit. Now, only the first one is a legitimate endeavor because the other 3 are just shadows of their former selves.

Consider real estate. The primary cause of the Great Recession was the bursting of the housing bubble. People bought expensive homes that they shouldn’t have (while lending institutions and the government enabled them) in hopes of continued growth in the market, believing they could turn around and sell the home a few years later for many dollars more. It wasn’t long before it was realized that they couldn’t support their investments: Rising energy and food prices socked the economy in 2007. That caused job cuts and cutbacks which in turn affected those who had taken on the exorbitant home payments. Housing prices plummeted and homeowners who were underwater abandoned ship. Because of that sting, people are hesitant to buy first and second homes again, banks won’t allow them to, and, above all, many people are incapable of doing so in today’s world because of high un- and under-employment and lower wages.

Government bonds and notes used to be solid investments, too. Someone could buy the debt from the government and, years down the line, reap the rewards from a solid yield in the 5 to 9 percent range in the 1990s and a middling 3 to 6 percent during the 2000s. Now, a 10-year Treasury note has a yield around 2.1 percent. To buy them at such low rates, you’d have to be either a fool, ungodly conservative, retired or worried about an all-out economic collapse. What has contributed to this destruction of the bond market is the willingness of the Federal Reserve to often buy-up debt in an effort to keep the federal government afloat.

The Fed has also been complicit in the loss of gains on Certificates of Deposit (CDs). Borrowing from the Fed and other banks is too easy for financial entities thanks to historically low rates, so banks no longer have a reason to lean on consumers for borrowing. Back in the 1980s your average investor could make a killing on CDs – 6-month returns were as high as 17 percent and 5-year CDs were at 12 percent. Now, the average yield on CDs is less than 1 percent (0.27 for 1-year CDs, 0.88 for 5-year).

So, that leaves the stock market as the only legit outlet for retirement and investment, especially for those in their 30s and 40s. The markets rose like a phoenix because of an ongoing influx of cash -- to the tune of hundreds of billions annually -- by private investors, 401(k)s, public sector pension plans who saw it as the only viable outlet. Any system receiving such an influx of cash is certain to prosper, even unreasonably, no matter the conditions. 

From the 11 May 2015 Greater Niagara Newspapers

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