Stock markets have continued reaching record highs in recent months, soaring to all-time peaks. Yet simultaneously, economic conditions on Main Street remain challenging, with high unemployment and many smaller businesses struggling. This divergence between Wall Street and the real economy has led many to wonder – why do stocks keep rising when the economy seems so bad?
Several key factors explain this paradoxical situation:
- Tech dominance – The major tech giants like Apple, Amazon, Microsoft and Google now make up a significant portion of the S&P 500 index. These tech titans have actually thrived during the pandemic, buoying the overall index.
- Fed stimulus – The Federal Reserve’s massive stimulus injection of trillions of dollars has provided an artificial boost to equities and other assets. This excess liquidity has pushed valuations higher.
- Retail investor trading frenzy – Individual investors flush with government stimulus checks have been aggressively trading stocks during the pandemic. Robinhood and other trading apps have added millions of new retail traders.
- Lack of investment alternatives – With bond yields extremely low, many institutional investors have turned to stocks to seek higher returns. This additional equity demand pushes share prices upwards.
- Vaccine optimism – Progress on COVID vaccines and hopes for a return to normalcy in 2021 are brightening the economic outlook. Stock markets tend to look ahead.
While the disconnect between financial markets and the real economy seems stark now, things may converge once again as the pandemic recovery takes shape. But for the time being, expect stocks to continue rising even if economic hardship persists on Main Street. The flood of liquidity is the ultimate driver.
But David Samuel of The Entrepreneur Monk said stock markets have nothing to do with the real world market.
“The select few are all that count. People read about the markets going up, so they buy stocks in different companies, and those stocks go down, and they are confused. ‘Why do my stocks go down, or not go back up, if the markets are at all time highs?’ he said.
“Because it is not a market that is up or down, but rather just a handful of companies. Let’s use the analogy of a shopping mall. There is a large grocery store in the mall, they are always busy, but the small independent stores have no business and make no money.
The owner of the mall says the mall has all time highest sales, because the only tenant that is counted is the grocery store, ignoring the little shops,” Samuel explained.
Samuel said “The lesson I would like to pass on to you is, the world of business is based on greed, but, you know that already. The real lesson regarding the stock market is; accept reality and find the ways they are trying to trick you, then go along with their tricks. But please, try to be a better person with the money you make than the ones who control the system.”