Saturday, May 05, 2007

4 Reasons why the Market is doing so well and the Economy is Not

The Dow is well into the 13,000s, the S&P is also in uncharted territory. On the other hand, the housing market is in its own uncharted territory with foreclosures at an all time high, number of payroll jobs added in April well below past numbers and the rate of growth, overall, of the US economy at mere 1.5 % for the first quarter of 07. So what could some of the reasons be why the market is doing so well...

a) With the housing market not very attractive for investors, people are investing more in the stoch market. Hence more money in the stock market, more demand, higher the price of the stocks.

b) The multinationals are doing very well in other countries such as China and India. They are shielded from how the US economy fares, hence a downturn in the US economy does not affect the bottom line of these companies - thus the stock prices remain steady.

c) Stock buybacks from big companies as they have large stockpiles of cash. This allows their stock to go north. The execs at these companies benefit from a higher stock whereas the economy as a whole suffers as that money is not spent in R&D, thereby not allowing for the 'next big thing' to drive the economy.

d) Stock predict the future. It might very well be that the economy numbers are an indicator of the past, like driving forward by keeping your eyes on the rear view mirror, as NPR's Marketplace host puts it, while the stock numbers are indications that the economy is on its way up by the end of the year. It might very well be that the feds lower the interest rates as a result of the week economy (as evident by the numbers), thus boosting the housing market and providing a shot in the arm for the economy as a whole.

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