Rise Of Stock Market Creates Wealth Effect

Posted on Posted in Daily Blog Post


As you are all aware, the U.S. Federal Reserves (The Fed) is targeting to bring down unemployment to 6.5% within 2 years, instead of fighting against inflation of which the current rate is only 2.5%. Go and check your grocery prices, and see if you still believe the inflation figure. Not only are they trying to manipulate all these figures, the Fed also has a team called PPT ( plunge protection team ) to standby 24/7 to elevate Dow Jones and SP 500. They believe that the rise of the stock market will produce wealth effect and boost the consumer spending which ultimately boosts the economy. It does make sense, but I tell you, it won’t work in the long term.

We all have a short term memory. Does anybody realise that the S&P 500 has more than doubled since its 2009 bottom on GFC? How is that possible with economy stagnation since 2009? The economy barely grows at all and yet all stock markets are rosy. Stock markets will eventually crash. In the long run, nobody can fight against the natural forces of the market. Remember GFC in 2008 - PPT just could not stop the crash.

There is one thing that I must mention here - what causes the market to rise and rise is the effect of the GFC. During that time, most individual investors panicked and sold into that 2009 bottom, and some kept selling stocks as the market started to recover. A few months ago statistics shows that equities are still very much under owned as most of them keep the money in the bank. A lot of money is sitting on the sideline. With the current wrong perception of the rosy economy (that will last), many retail investors start to jump back in. That is fine if they know when to exit, otherwise, they will face the same slaughter as experienced in the 2008-2009 GFC.

Last night, retail sales (U.S) report was better than expected results: Retail sales jumped 0.1% from March to April. The consensus among dozens of economists polled by Bloomberg was expecting a drop of 0.3%. The market thinks this is a good number. But be careful with the ‘massage’ figure. In true honesty, if you take away the Census Bureau's "seasonal adjustments," , the number actually fell 2.6%. Again, who cares as long as everybody makes money now - be happy and don’t worry.

Technical And Cycle Timing Signals

I expect markets ( Gold Silver, USD, Dow, SP500, Nikkei, Euro ) soon to have some sort of short term turning points. Details are reserved for subscribers.

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