The stock market is going up, commodity prices are strong. All an investor has had to do over the last six months is just own the market. So why are things rosy on Wall Street and only mediocre on Main Street?
What a difference six months makes. Last summer, investor sentiment was so bad that stocks were selling off on good corporate news. Now everything seems rosy again. The stock market is going up, commodity prices are strong. All an investor has had to do over the last six months is just own the market. So why are things rosy on Wall Street and only mediocre on Main Street?
The answer lies with the Federal Reserve and the central bank’s policy to keep the world awash in cash and interest rates artificially low. This helps Wall Street much more quickly than it does Main Street. Traders and investors would rather place their bets on stocks over real estate. It’s all about liquidity and the ability of investors to trade within it.
Eventually, though, the central bank is going to have to reverse course. It can’t keep pumping up the system forever. The hope among monetary policy makers is that the economy will be strong enough to grow on its own and then the Fed can withdraw some stimulus without negatively impacting the economy. What’s holding the central bank back from raising interest rates right now is mostly the employment situation. The job market isn’t healthy enough yet for changes to the monetary policy, but the stimulus is creating price inflation on Wall Street (stocks and commodities). It’s not yet happening on Main Street (jobs and income).
So, we have a situation where the stock market keeps ticking higher, even in the face of major uncertainty in the Middle East. Institutional investors are happy to buy stocks, because corporate earnings are growing and interest rates are so low. It’s a perfect world for Wall Street and there is a lot of hope out there. Investors are buying stocks based on those hopes and it’s the typical move: buy on anticipation, sell on the reality. The reality, however, has yet to reveal itself.
The stock market is due for a major correction, but it needs a catalyst. So far, geopolitical uncertainty has proven to barely affect sentiment. Even lackluster employment numbers and flat housing prices can’t dent investor enthusiasm at this time. We have a bull market in an overall bear market, and it’s all because of the Fed.
Large-cap indices should continue to do well over the near term, because so many of these businesses are well diversified internationally. Asian operations are providing the growth, while European and American operations are slowly improving.
The right shoulder on the S&P 500 Index continues to form and it’s eerily similar to the left shoulder. Pull up a long-term chart on the index and you’ll see an amazing pattern that’s very symmetrical. It certainly leaves you wondering what the next major price trend will be. Whatever it is, it will be due to inflation.
Iconic Chart Shows Biggest Devaluation of Our Generation
Yesterday, China’s central bank said its foreign-exchange reserves have hit $3.0 trillion for the first time in its history. China is awash in dollars. The U.S. itself has too many dollars floating in its financial system. Is it any wonder the U.S. dollar is collapsing in value against a basket of currencies made up of other major currencies?
Taking Stock: A Lot of Good News Already Priced Into Stocks
Most capital markets are due for a correction and that makes it more difficult to be a new buyer of stocks, bonds or commodities right now. All you have to do in the equity market is pull up a one-year stock chart on the S&P 500 Index and you’ll see the tremendous capital gain. The market has already priced in strong first-quarter earnings and, if companies don’t announce strong second-quarter visibility, share prices will retreat. So, what's next for investors?
A Safer Way to Invest in China: The Large-cap Chinese ETF
Playing the Chinese capital markets involves excessive political and economic risk. While the risk is high in trading Chinese stocks, especially of the small-cap variety and for smaller trading accounts given the current selling of Chinese reverse merger stocks, there's another, lower risk way you could play China.
