The Stock Market Rally Continues! Until it Doesn’t

Industry experts are predicting that the recent rally in the stock market will continue for the moment. That is until it doesn’t. Low market volatility appears to be on the agenda for now, but some forecasters are projecting a rough summer for investors. In fact, a stock market crash may be on the way.

How Long Can the Stock Market Continue to Rally?

According to economists, the U.S. stock market predicts how well the country’s economy is doing, so when the stock market performs well, then the economy is also strong. However, a growing number of experts believe that the current stock market belies the country’s actual economic conditions.

Currently, the U.S. stock market is giving the appearance of being in good shape. After bottoming out in March of 2009, the market has rebounded. In the last seven years, the NASDAQ has grown by more than 250 percent while the NYSE is up by 130 percent. The S&P 500 has risen by 182 percent, and the Dow Jones Industrial Average is 145 percent higher.

While these numbers are encouraging, they may be somewhat misleading due to their cause. The market’s recent gains were powered by income-famished investors grasping at cheap money that the Federal Reserve put in front of them to support quantitative easing. This situation brought about lower interest rates. It also led to investors adding more money into the stock market. MarketWatch1 reports that it’s tough for investors to hold back while the rally is still in effect. Channing Smith, a portfolio manager at Capital Advisors, said, “We are in an environment where negative economic data, negative earnings growth and even a drop in oil are now shrugged off.”

When Will the Economy and the Stock Market Shift Back in Line?

Despite reports of underwhelming corporate earnings and the lack of revenue growth, the stock market is continuing to trend near record highs. However, companies can only cut costs to boost earnings for so long. In addition, according to Bloomberg2, many investors are purchasing stocks to cover shortages.

Erratic investors are currently propping up share prices, but they can only do so for a short time. At some point, the economy and the stock market will need to shift back in sync. The only way for this to occur is if investors are patient and willing to wait. With the last seven years of easy money, it seems unlikely that investors will wait it out. They are more likely to hightail it for the exit. If they do, then stocks will take a nosedive.

After the last few years of the stock market being on the kind side to investors, there are indications of a correction. Since the start of 2015, the NASDAQ has dropped by around 5 percent while the NYSE has fallen by about 11 percent of its value. In addition, the Dow Jones is down by around 10 percent and the S&P is in the red by 8.5 percent.

Signs that Nerves are Getting to Some Investors

Despite the continued rally, investors at all levels are showing signs of nerves. According to CNBC3, hedge funds have reached a four-year low while money is draining out of equity funds following a brief moment of reversal. When the American Association of Individual Investors completed a survey to determine bullish sentiment, the organization reported that sentiment had fallen to 19.3 percent. This is its lowest level since the first of the year. In addition, it is just the ninth time that this area of optimism has dropped lower than 20 percent since 1990.

Other nerve contributing factors include recent central bank policies around the globe, the threat of a British departure from the European Union and moderate economic growth. The presence of these issues is causing investors to avoid committing new money to a market that is likely overvalued. Michael Cohn, a leading investment strategist for Atlantis Asset Management commented on the situation. He said, “In reality, it’s still the fear of the unknown. The fact is nothing has really changed. The fear out there is that there is another shoe to drop somewhere down the road.”

Is the U.S. Stock Market on Borrowed Time?

Sam Stovall, a U.S. equity strategist at S&P Global Market Intelligence, said, “I’m a little watchful to see how we continue from here. What a lot of people are saying is it’s just a bear market rally. It’s a countertrend rally.” In time, economic conditions may reveal that the U.S. stock market has been living it up on borrowed time. The market will rally until the day that it doesn’t. To read more about the markets and the possibility of a crash, visit the PersonalMoneyStore.com.

  1. MarketWatch
  2. Bloomberg
  3. CNBC