Why is the stock market disconnected from the reality of what’s happening on the ground? Few are vacationing, driving, shopping, eating in restaurants, going to bars and millions are unemployed, yet stocks hit record highs each week. Can the Feds endlessly support the pre-pandemic economic levels that don’t currently exist?
It seems bizarre that the stock market is doing so well in the midst of the worst economy since the Great Depression.
There are several reasons, though none are directly connected to the economic value of companies, the traditional method by which market prices are measured.
The Federal Reserve Board’s injection of trillions of dollars into the nation’s economy is key. More money circulating means more economic activity than there would be otherwise.
Especially notable: For the first time ever, the Fed has been buying corporate bonds, including junk bonds, helping keep even weak companies afloat. The Fed’s low interest rates, meantime, encourage borrowing, which usually leads to economic growth. The low rates mean investors chase bigger returns, and stocks have been about only investments yielding big returns the last several years.
Another factor: passive investing.
Those who sink part of their paycheck every month into a 401(k) program tend to put large chunks of it in funds that track major parts of the stock market or the market as a whole. All this money keeps the stock market propped up.
(Article written by Russ Mitchell)