Why is the stock market so resilient?


Despite the unimpressive economy and the drama engulfing the political world, the stock market is remarkably calm. But that’s nothing new. Since the Financial Crisis, the markets have shrugged off a weak economy, the Fiscal Cliff, the Sequester, a government shutdown, multiple crises in Europe, and more… So why are the markets so resilient? 

Let’s examine the most recent stuff first. Clearly, part of the recent stock market optimism was the promise of deregulation and tax reform. However, given the turmoil in Donald Trump’s presidency, the markets have reason to doubt that promise. So why isn’t the stock market spooked? To answer that question, I’m going to quote myself from back in February: 

“There is nothing the stock market would like more than for Mike Pence or Paul Ryan to take over as President tomorrow. If that happened, the markets would get all of the positive parts of Donald Trump – without all the childish ignorance.”

However, as happy as the markets would be with a President Pence, there’s a real risk of a long, drawn-out investigation that could slow the Republican agenda to a halt. The quicker all this can be resolved, the better. For now, it seems the stock market is betting on a quick outcome. 

Beyond the political drama, the markets are also happy that Trump is playing nice with China and things are calming down politically in Europe. In addition, while the economy isn’t booming, it is still growing, and the likelihood of a recession is low. Further, even if a recession comes, the Fed has proven it’s willing to pull out all the stops to help the economy. In addition to all that, corporate earnings have been solid (which is what the markets care about most). So, despite all the scary stuff, there are plenty of excuses for the markets to continue rising. 

However, I think there is something far more simple that is keeping the markets strong:  Huge sums of money are flowing into the stock market every day. Consider how many more people are making monthly contributions to their 401K’s and IRA’s than they were 20 plus years ago. Because of that, there is a never-ending demand for stocks. If you remember economics 101, more demand means a higher price. 

There’s another important aspect to this, which is the rise of index funds. Index funds aren’t managed, which means there’s no one choosing when to buy or sell, or when to be excited or scared about the markets. With index funds, no one is making those decisions. Whether the economic and political news is good or bad, billions of dollars still flow into the stock market month after month after month. So, perhaps the markets keep rising because investors are asleep at the wheel. 

I’m not sure what to make of this phenomenon. Today’s stock market is different than anything in history. It makes me wonder if economic and political discussions are completely irrelevant. As long as investors keep pushing money into the markets relentlessly, the markets might rise relentlessly. Obviously, at some point, it has to stop; but the old rules seem to have changed, so I have no idea when. 

Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at brad@blackburnfinancial.net

User menu

NCW Media Newspapers