The headlines in the Wall Street Journal told the story:
“Markets’ Monster 2023 Rally Defied All Expectations.”
Akane Otani writes,
“Stocks burst out of a bear market, with the NASDAQ Composite up 32 percent and posting its best first half of a year since the 1980s. Bitcoin surged more than 80 percent despite the U.S. Securities and Exchange Commission suing the world’s biggest cryptocurrency exchanges. Bonds enjoyed some reprieve, too. Indexes tracking everything from Treasury’s to junk bonds have posted modest gains following their historic selloff last year.”
“Why did markets keep rising, despite a banking crisis, the threat of a U.S. default, and more interest-rate increases from the Federal Reserve? “
Is something going on? Have the times changed? Just what is happening?
Well, I have suggested two fundamental reasons why the stock market…and other financial markets…have been doing so well.
First, there is a change in the way the economy is functioning. The new world being built around digital technology and with new innovations coming to the market place all the time is acting differently. And, consequently, the stock market is acting differently.
For example, Ms. Otani writes about “many of the best performing stocks this year remain megacap technology companies….”
These are companies whose performance do not conform to the “classical” business cycle and are built upon their own cycle of “time pacing.”
Furthermore, “new” innovation, like artificial intelligence can impose itself upon markets without reference to the current state of the business community.
Ms. Otani specifically cites this possibility and references the role the investors play in bringing “to the forefront” creations like that of artificial intelligence.
Second, the monetary policy of the Federal Reserve is not really at “tight” as the Fed would like us to believe it is. I covered this in a post published not long ago.
And, if one looks at the list of areas Ms. Otane refers to as taking off in this time of Federal Reserve monetary tightening, one can only remark that the beneficiaries of this swing coincide closely with those assets that profited during the fourth round of quantitative easing that the Fed engaged in during its response to the spread of the Covid-19 pandemic.
During this period of time the Federal Reserve inserted massive amounts of money into the financial system, amounts that have not, over time, been removed.
The current market performance can be said to be living off of the excesses of the earlier “asset price bubble” that the Federal Reserve created to fight the crisis.
If one looks around the banking system these days, one still finds pools of cash waiting to find a place to earn a “good” return.
Yes, the Fed has worked to reduce liquidity in the banking system over the past 15 months, but it has not removed anywhere near the amount needed in order to get back to a “more normal” situation.
Consequently, many financial institutions and financial markets have access to funds that can fuel stock prices. This is what can happen during the lifetime of asset bubbles. Getting completely out of the “bubble” can be quite difficult.
If companies need money, they can find it.
In terms of quantitative tightening, the Fed has been reducing the size of its securities portfolio for fifteen months straight. It has been very regular and persistent in this effort.
Yet, the commercial banking system has almost $3.2 trillion in excess reserves on deposit at the Federal Reserve.
And, Joe Rennison and J. Edward Moreno report in the New York Times that “seven of the 11 major sectors in the S&P 500 expected to report earnings growth from a year ago. Importantly, analysts forecast renewed earnings growth for the index as a whole starting in the coming quarter.”
The lingering feeling on Wall Street is that investors just do not believe that the Federal Reserve is going to go beyond what it is now doing to combat inflation.
If that is the case, there will be plenty of money around and the stock market can continue to perform.
And, this argument doesn’t even include any discussion about how the major government spending connected with “Bidenomics” will add to the performance of the economy.
Conclusion…these all seem to be favorable contributors to a rising stock market.
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