Two Reasons Stocks Continue to Climb
Yesterday I outline a critical issue that ALL investors need to understand.
There is little if NO correlation between the stock market and the real economy.
By quick way of review, I provided two key examples of this:
- Between 1972 and 1982, the US economy nearly tripled in size from $1.2 trillion to $3.2 trillion. And yet, throughout that entire period the stock market traded sideways for ZERO GAINS!
- In contrast, from 1982 to 2000, the US economy again nearly tripled in size from $3.2 trillion to $10 trillion. But during this particular time, the stock market exploded higher rising nearly 1,500%!
So, there are two time periods in which the US economy nearly tripled, and stocks returned ZERO or nearly 1,500%.
Which brings us to today. It is clear the US economy experienced a sharp and severe recession/depression following the economic shutdown due to the COVID-19 pandemic. And yet, stocks are exploding higher.
Why is this?
Powerful Money Controls the Market
There are two major reasons that stocks are exploding higher despite the economic downturn.
First, central banks are flooding the financial system with liquidity. In the last three months alone, they’ve pumped over $5 trillion into the financial system. That’s an amount larger than the GDP of Japan!
This money has to go somewhere. And some of it is flowing into the stock market.
And why not?
Interest rates are at zero, so bonds are offering little if any yield. So investors need to pursue riskier asset classes (stocks) to produce significant returns.
Second, fund managers/institutions are putting capital to work in the markets.
By law, many investment funds and institutions are required to have a percentage of capital allocated into stocks. Put another way, unless there’s a full-scale crisis underway, these groups HAVE to buy stocks.
After all, the investors who entrusted these managers and institutions with their capital aren’t paying them to sit on cash!
So these groups are buying stocks. And they are concentrating on growth stocks.
Strategic Investing in a Volatile System
Take a look at Chewy.com (CHWY).
CHWY is an online pet goods retailer, selling pet food, pet toys, and pet medications.
Pet care is one of the few recession-proof industries in the US.
Overall, pet spending rose during both the 2001 and the 2008 recessions. And CHWY is a pure play on this – tailored for an environment in which consumers want to take care of their pets without going to an actual store.
With that in mind, consider that CHWY’s revenues have more than tripled from $900 million in 2016 to $4.85 billion in the last 12 months. Because of this, CHWY shares actually ROSE during the COVID-19 shutdown.
I recommended CHWY to subscribers of my Strategic Impact newsletter and the stock has shown strength since.
In a low growth, high liquidity environment such as today, hedge funds and financial institutions see higher returns courtesy of rapid growth.
And that’s how you see outsized returns from the market.
Editor, Money & Crisis