Why Is Stock Market Doing So Well

Jul. 20, 2023 2:52 PM ET ACTV, AFMC

Summary

• The stock market is performing strongly even though the Federal Reserve’s tightening of monetary policy began in March 2022.
• Economist Alan Blinder brings up the possibility that those that thought inflation might just be transitory in 2021 might have been correct after all.
• Investors who have been questioning what the Fed has been doing since fall 2022 might just be right.
• At least, this possibility is seeming more and more probable as time goes along and more information comes to the surface.
• Investors might just be right for the world has changed, and living through a period of radical uncertainty like we are, may cause us to question our previous pictures of how things work.

Introduction

The stock market has been doing well in recent months, even though the Federal Reserve has been tightening monetary policy. This has led to some speculation about why the stock market is doing so well, despite the headwinds from the Fed.

The Transitory Team

One explanation for the stock market’s performance is that investors believe that inflation is transitory. This is the view of the “Transitory Team,” a group of economists who argued in 2021 that inflation would eventually fall on its own. The Transitory Team was initially mocked by many economists, but their view has gained more traction in recent months as inflation has started to decline.

The Fed’s Quantitative Tightening Program

Another explanation for the stock market’s performance is that the Fed’s quantitative tightening program has not yet had a significant impact on the financial system. The Fed’s quantitative tightening program is designed to reduce the amount of liquidity in the financial system, but it has only been in effect for a few months. It is likely to take several years for the Fed to fully unwind its quantitative easing program, and in the meantime, the financial system will remain awash with liquidity.

Conclusion

The stock market is a complex asset class, and there are many factors that can influence its performance. The two explanations discussed in this article are just two of the many factors that could be contributing to the stock market’s recent performance. It is important to remember that the stock market is a volatile asset class, and there is no guarantee that it will continue to rise in the future.

Additional Thoughts

In addition to the two explanations discussed in this article, there are a few other factors that could be contributing to the stock market’s recent performance. These include:

• The strong performance of the U.S. economy. The U.S. economy has been growing at a healthy pace in recent months, and this is likely to support corporate earnings and stock prices.
• The low level of interest rates. Interest rates are still relatively low, which makes stocks more attractive to investors than other asset classes, such as bonds.
• The continued flow of money into the stock market. The stock market has been a popular destination for investment capital in recent years, and this trend is likely to continue in the near term.

It is important to note that these are just some of the factors that could be contributing to the stock market’s recent performance. The stock market is a complex asset class, and there are many factors that can influence its performance. It is important to do your own research before making any investment decisions.

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