Why Stocks Climb
There was an interesting article last week, one I should have blogged. The author floated an explanation for both why the stock markets have been climbing and why the bond markets have been rising along with them. He suggested that it is all about interest rates. At 0% (or less) interest from the central banks, it makes sense for people to go anywhere (stocks, bonds, commodities). The only thing that would stop this would be expectation of higher interest rates. Until then, it’s a bubble everyone can play.
I like that explanation better than the one I’m reading today:
Here’s a puzzle: The stock markets are doing very well, yet the performance of the underlying economy doesn’t seem to justify optimism. The buoyant S&P 500 has risen 53 percent since the March bottom. And while the economy expanded at a 3.5 percent rate in the third quarter, unemployment is high, incomes are stagnant, and consumers are shaky.
…
The rising U.S. stock market and a weak, slow-growing U.S. consumer sector aren’t really in contradiction. Given the large-scale trends transforming the global economy—and the role of large U.S. companies in it—it may be possible to have a sustainable rally in American stocks without a sustainable rally by American consumers.
It would be nice if this rally were driven by rational expectations of global growth … it really would.