Why is the Stock Market Up?
Stocks Roll: What's Happening?
Why is the Stock Market Up? What is Happening?
The stock market is a discounting mechanism. Equities are not necessarily concerned with what is happening today. Rather, stock price fluctuations take their cues from what we think is going to happen tomorrow.
Intrinsic valuations are related to the growth of future cash flows, and the competitive returns earned upon that money if it were to be reinvested at the "risk-free" rate. Treasury securities are described as risk free because of the Federal government's power to tax and run the printing presses to create dollars. Low interest rates make the future earnings potential of equities more attractive.
The Federal Reserve Board creates money by purchasing treasury securities through the Federal Open Market Committee. Doing so floods the market with cash, while the Fed effectively targets its preset federal funds rate.
Commercial banks hold reserves at the Federal Reserve Bank as a safeguard to the stability of the financial system. Banks that carry excess reserves make loans to banks that are short of their requirements, and charge interest. These loans are typically made overnight. Hence, the term "overnight lending rate."
Why is the Stock Market Up? Today's Federal Funds Target Rate is Zero Percent.
This unprecedented call to drop interest rates to the floor has emerged to manage the carnage of the worst economic event since the Great Depression. Financial intermediaries make money by borrowing capital and making loans or investments at higher rates of return than the interest that is paid out. The zero percent fed funds rate lowers the costs of capital and provides tail winds for the banks to recover.
Why is the Stock Market Up? Comparisons to Last Year
Beyond the financials, industrial stocks had been completely bludgeoned during the 2008 rout-to the point where recovery was inevitable. The Dow Jones Industrial Average began to trade as if the Western model was doomed to fail. In fact, the market valued hundreds of companies at lower levels than the amount of cash held on the books. At the moment, profits are "up," because of comparisons to last year's horror, and aggressive cost cutting.
Time will tell whether the current trend upwards is actually generating real value, as opposed to the smoke and mirrors gimmickry of high finance.
Why is the Stock Market Up? Sources...
Bloomberg - Stock Market, http://www.bloomberg.com/markets/stocks/movers_index_ibov.html
The Federal Reserve System - Purposes and Functions, http://www.federalreserve.gov/pf/pf.htm
Kofi Bofah, Common Stock Valuation Methods, http://www.ehow.com/about_5443922_common-stock-valuation-methods.html
Published by Kofi Bofah
Kofi Bofah has been writing Internet content for one year. His articles appear on Associated Content and eHow, Trails and GolfLink via Demand Studios. He is originally from Silver Spring, Maryland. This... View profile
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9 Comments
Post a CommentMuch of which you write about the Stock Market is Greek go me, but in my simplistic little average person's mind, I think stocks are up because the folks in DC bailed them out while leaving the rest of us on Main Street to flounder with no jobs. I have no job and a huge student loan to pay; who's going to bail me out?
"Time will tell." That's about as honest as it gets. The "it's all in the head" school mixes with the fundamentals until, sometimes, you cannot tell which is push, and which is pull. You write well.
I got nothing left for the market. You got it right. Good question Abby
You are absolutely right. Time will tell.
The market may be going up, but isn't the dollar going down? That's the connection I don't understand. Well, along with just about everything else, lol.
You're in the right line of work, Kofi. This stuff makes no sense to me. You did a good job explaining it, but it's still not quite sinking into my brain. Did you take a little vacation? Or just busy with your "real" job? I was missing you on AC. :)
Is that that same reasons gas prices are going up - fast?
Awesome article and analysis, Kofi! :)
Very interesting analysis. I have a feeling that the stock market won't stay up for long, though. Hope I'm wrong.