Why Do Stocks Keep Going UP?
Updated: Oct 16, 2020
Stocks generally go up and down, most people will say "they go up in the long run" without ever explaining why that is. During COVID stocks have reached record highs despite companies facing serious challenges. Companies today are not doing as well as they were a year ago when the world was pre-COVID; today they have lower sales, lower profits, lower expectations of growth, etc. So WHY ON EARTH do stock prices keep going up?
We can explain this fairly simply. Stocks have risen and will continue to rise during COVID because of stimulus from the federal government. Essentially, the US government is spending gobs and gobs of money on bonds, only to buy them so they will be taken off the market. The previous owner of the bond takes the money he or she made from selling it, and would normally use it to buy a similar bond or group of bonds. However, the US has been buying up so many bonds, that there quite literally aren't many other places for that money to go. So they end up putting into the stock market. The Federal Reserve, the country's government-run bank, is spending a total of $5-7 trillion (yes, trillion) on bonds essentially plucking them from the open market.
The US bond market is worth about $40 trillion, so about 12.5% of the bond market has poured into the stock market simply because there is no more space in the bond market. The US stock market is valued at roughly $23 trillion. So with a stimulus of $5-7 trillion from the US government, we can expect the stock market to rise about 20-25% above its pre-COVID highs.
A good question we should be asking is, how will the US repair the economic damage that has been caused by the virus? The economy will certainly resemble normalcy once the virus is gone, however, the US economy was on the verge of recession pre-COVID. Interest rates cannot remain zero or near zero forever, and when interest rates rise there will likely be trouble.