re: Why is the stock market rallying right now?

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Why is the stock market rallying right now?

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Short answer: There is enough smoke and mirrors over the likely coming economic problems that the market's hopium-tinted view reigns supreme.

Longer answer:

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High employment

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High employment is a good thing. There being so many jobs available means competition for workers pushes wages higher in a way far more organic and economically tolerable than raising the minimum wage. This increases GDP which translates into higher profits for companies.

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uncertain presidential election year

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Many election years are uncertain. This would only really bother the market if you had someone with a strong possibility of winning who was very unfriendly towards business (a lesser version of this can be seen going on in New York right now with the Trump "fraud" case). Right now the market's belief may be that either things will remain the same (Biden) or get better (Trump), in other words it's a no-lose situation so it doesn't really matter.

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high interest rates

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The economy seems to be adapting to the rates (at least for now) and the market is reacting to that. Rates had been unrealistically and historically low for a very long time, I think the historical average is somewhere around 5%. In an ideal world, this means getting the economy back into some sort of balance with more gradual heating and cooling periods which last shorter times rather than the longer and more intense periods we have seen in some instances over the last decade or so (like with housing).

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record inflation

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Inflation has come down tremendously over the last year or so. Even at its worst inflation may have been "near record" to what we saw in the early 80s, but it's measured so differently now that it's a useless argument.

All that said, here's why I see economic problems hiding behind all of this (and why I think the market's view of the world through its lens of hopium is going to end up biting a lot of people in the arse):

Consumer debt continues to grow strongly while much of that debt is being created at historically high credit card interest rates, which is likely a large part of why we continue to see delinquency rates continuing to rise. Those interest rates are also why this is likely to not change anytime soon.

The consumer's ability to buy goods and services is a foundational function. Real hourly wages have grown only .09% over the last year, while Real GDP grew far more. This means a LOT (perhaps a majority) of that growth has been on the backs of consumer credit card debt at the historically high interest rates I mentioned earlier. That's untenable.

This excess debt spending as well as the glut of federal money pushed into the economy during COVID (and after) is keeping inflation sticky. That too is not going to change anytime soon (unless consumers begin defaulting on their debts and Congress pulls back on spending).

As to the market itself, around 30% of the market's growth comes from the Mag 7 stocks. Without those, the market's growth would be mediocre. In the same breath we hear portfolio diversification is important, we're seeing more and more eggs lumped into only a relatively few baskets. That should be concerning, but the high of watching NVidia soar is just too attractive and supports that hopium-tinted view.

So what it boils down to is that, economically, we're in a race to see if wage growth can outpace the stickiness of inflation before consumers begin defaulting. That's going to be the difference between the consumer debt bubble popping or quietly deflating. The market doesn't care, it just sees profits and GDP.

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If you invested $10,000 in the S&P 500 index at the beginning of 2021, then at the end of 2022 you'd have $8,056 (-19.44%) at the end of 2023 you'd have $10,008 (+24.23%) and YTD you'd have $10,678 (+6.69%).

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You skipped 2021 year end…

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at the end of 2022 you'd have $8,056 (-19.44%)
at the end of 2023 you'd have $10,008 (+24.23%)
and YTD you'd have $10,678 (+6.69%).

So 2023 made up for 2022, and now we're finally moving forward after two years and a shite-ton of inflation.

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That's cool except for your math being completely wrong. Maybe take another stab at it.

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You're right, but... If you invested $10,000 in the S&P 500 index at the beginning of 2021, then

at the end of 2022 you'd have $8,056 (-19.44%)

at the end of 2023 you'd have $10,008 (+24.23%)

and YTD you'd have $10,678 (+6.69%).

So 2023 made up for 2022, and now we're finally moving forward after two years and a shite-ton of inflation. Bidenomics works, people!

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Are you serious with this calculation? You can’t be. This sounds like RoyalWenomics and it is comical. Keep trying to paint a bad picture, but even liberals don’t cherry pick data like you just did. You just completely did away with the 27% gains in 2021 if you invested $10k at the beginning of the year like you suggest. The actual number you would have is closer to $13,500 if you had invested $10k on 1/1/21.

Some of you people with your gloom and doom under a politician (Republican or democrat) are so biased it is ridiculous. Take that stuff to the poli board and let the adults have a spot on TD.
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Some of you people with your gloom and doom under a politician (Republican or democrat) are so biased it is ridiculous.

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Vanguard ran a chart last election period showing market performance under D and R presidents since FDR. There was about .1 percent difference.

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High employment

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Not really. ETA I took it to mean you actually meant to say high unemployment

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record inflation

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Why would you think stock prices would go down while inflation is high?

Personal opinion: it sounds like you let your personal political biases really blind you to market realities

I just did a quick Google search for S&P 500 index performance and took the numbers it gave me. I meant to say 'beginning of 2022' or 'end of 2022', so yeah, my bad.

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think it depends on how much of the total debt that bottom third of borrowers own. If it's 10%, I think that gets weathered. If it's 50%, that's going to be a massive problem as suddenly you have a swath of consumers no longer able to put things on their credit cards (and the economy runs heavily off of that delayed payment ability).

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Oddly, my suspicion is a disproportionately lower balance than upper class Americans, but I’m struggling to find updated data.

Here’s something though…

I don’t think you really keep up with the news.

Interest rates are higher, but still historically at mid levels and are expected to go down by mid year. Unemployment is very low and most companies are having a hard time finding enough job prospects. Corporate profits are very good. Inflation is half of what it was last year and was never at historically high levels. Yes, uncertainty in the election, but it’s only February.

The market will keep going up until it doesn’t. Then it will go down. Then probably back up.