- Why is the stock market doing so well in a down economy?
- Analyst Vincent Malanga points to the Fed lowering interest rates, prompting investors to move money out of bonds into the equities market.
- Malanga believes the economy may slip into "some type of recession" toward the middle of 2013.
The economy has been tanking for months, yet the stock market keeps setting new highs every day.
While it’s made 401-Ks shine, something seems amiss when billionaires Warren Buffett, George Soros and John Paulson become glass-half-empty grouches, and start dumping their American stocks like hot potatoes. Donald Trump recently said that America “is teetering on the edge of financial ruin.”
Trump should know. So, apparently, do preppers, those wacky, urban survivalists who don’t want to be caught with their pants down should society suddenly go to seed. They’re stocking up on ammo, camo and Sterno.
Can you blame them?
There is gridlock in Washington, as politicians can’t decide whether they want to raise taxes on their constituents or wean them off government programs.
Meanwhile, the national debt is at $16.7 trillion and climbing by $3.8 billion every day. Each citizen’s share of the federal debt is a little under $54,000, according to the U.S. National Debt Clock.
Over the last 10 years, Medicaid and Medicare have grown by 38 percent and 68 percent respectively, while Social Security has grown by 38 percent. Government spending as a percent of the gross national product is a little over 40 percent. It’s been higher, 53 percent at the height of World War II.
According to the Congressional Budget Office, the federal debt is expected to surpass the size of the entire U.S. economy by 2024. Meanwhile, interest on the national debt is currently the fourth highest federal annual budget item.
Unemployment is around 8 percent, and probably should be higher because the rate reflects actual job seekers, not those who’ve decided to save shoe leather. Wages increases are anemic, credit hard to come by and gasoline prices rising.
On top of that, Washington let the payroll tax cut expire on Jan. 1, 2013, meaning every wage earner in America, not just the rich ones, are receiving smaller paychecks.
Even Mister Rogers would find reason to frown.
And yet, the DOW Industrial Average was at 14,500 at the time of this writing.
What’s up with that?
According to Vincent Malanga, president and CEO of LaSalle Economics, it doesn’t have anything to do with a Democrat or a Republican. It’s all about the Federal Reserve lowering interest rates to funnel money into the housing market in an attempt to get the economy going.
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Lower interest rates have made bonds “overpriced” to investors, according to Malanga. “As a result, advisors have been telling investors to move money out of bonds into equities. That’s a big reason why you’ve seen the equity market rally to the degree that is has over the past 45 days.”
Malanga says that even with the Federal Reserve actions, “there is still a chance that the economy might tip over into some type of recession as we move through the middle portion of this year.”
And what will happen to the stock market should that occur? Your guess is as good as mine.