Stocks Continue to Break Records – Is It Really Different this Time?
Stocks continue to break records despite financial analysts’ predictions of doom due to Brexit, or Britain’s decision to leave the European Union, and sluggish economies throughout the world. Artificially low oil prices due to the price war between Saudi Arabia and shale-oil producers in the United States, despite providing a big benefit to consumers, have forced many oil-producing companies to the brink of bankruptcy. The stock market seems oblivious, according to a report at Telegraph.co.uk1. In fact, the United Kingdom posted its 14th consecutive quarter of economic growth and suffered only marginally so far from its decision to get out from under EU strictures that the country’s citizens consider stifling and conducive to terrorist attacks.
Analysts struggle to explain why stock values continue to advance in the face of poor economic indicators. The Telegraph article explains that the domestic financial situation in the U.K. isn’t as bad as many financial analysts think. The Conservative Party quickly rallied to name a new leader and rally support for a “reconciliation” government to support the Bank of England’s efforts to move forward post-Brexit. Of course, that doesn’t explain global record-breaking stock market gains for the S&P 500 and other investment vehicles,
Record-Breaking Stock Market Gains Defy Expert Predictions
Marketwatch.com2 reports that the U.S. economy grew at 1.2 percent in the second quarter of 2016, which was slightly better than the previous quarter but not as strong as economists hoped. Sluggish growth could compromise the plans of the Federal Reserve Board to raise interest rates. Many experts have attributed the advancing stock market to issues that range from investors expecting stimulus money from global governments to consumer investors looking for safe stocks to weather an anticipated financial recession.
Mixed Signals Point to Future Difficulties that Won’t Easily Be Ignored
A series of reports from respected authorities indicate that a recession is already here. CNBC.com3 quotes Janet Yellen, chair of the Federal Reserve, who explained that the United States has already entered recession based on adjusting GDP growth for inflation. Artificially low oil prices have kept inflation rates low, but increases in other areas are certainly higher than the average figures show. Yellen points to the price of copper as a strong barometer of economic strength, but copper prices have been in a bear market for five years. The Baltic Dry Index, which measures economic trends based on total global shipping, has fallen 75 percent since the end of 2013.
Forbes.com4 reports that low oil prices have kept many national economies from seeing the full effects of recession. If the price war ends and oil prices begin to recover–and possibly soar–inflationary pressures will become tremendous and could easily trigger worldwide recession.
All Indications Point to Uncertainty in the Second Half of 2016
It doesn’t seem that the good news in the stock market can last forever. Many investors shifted their investments to the United States, which the Fed claims is already in recession. Another CNBC.com5 report quotes Goldman Sachs economists who predict at least a mild recession in the U.K. by early 2017. This prediction is based on factors such as deteriorating terms of trade due to Brexit and investors holding off to see what happens as the date for actually leaving the EU approaches.
The EU faces losses in GDP over the next two years that experts predict will range from 0.5 percent to 1.25 percent. Uncertainty about the U.S. economy and the 2016 presidential elections also generates economic and political uncertainties that will inevitably affect investor activity. However, things really could be different this time because there appears to be a new trigger for increased stock investment. Collapses in bond yields have made stocks more attractive. Investment companies are scrambling to find investments that will generate income because the bond markets face prolonged interest rates at or near zero yields. People saving for their retirement can’t deal with investing their money for 50 years without earning any appreciable return, so the stock market might remain in a healthy bubble despite almost universally poor economic indicators.
Low Interest Rates Could Create an Atmosphere that Favors Investing in Stocks
Many experts worry that interest rates have become locked into low rates, which seems to be the major stimulus for unprecedented gains in the stock market. Equity investors are more willing to gamble on stocks because it seems unlikely that their firms can earn enough money from depressed interest rates to keep their customers happy and loyal. Find out more about economic news and the stock market at the PersonalMoneyStore.com.