Why Do the Markets Keep Going Up?

The stock, bond and housing markets are at all-time highs right now. This is before we have fully escaped the pandemic shut-down that we have lived in for the past 15 months. Our economy seems to be just getting going again, yet stock, bond and home prices are at levels that should be scaring most investors. Sure, there are many reasons that the market behaves like it does: corporate earnings, the economy, interest rates, inflation, actions by the Fed, government spending, quantitative easing, stock buybacks, low taxes, demographics, dividend yields, etc. But right now, one of the most basic economic forces seems to be in charge: the laws of supply and demand.

Ben Carlson, one of my favorite investment bloggers, recently addressed this phenomena in an article titled “What’s Driving the Stock, Bond and Housing Markets Right Now?” He states:

“It’s never just one thing that moves the markets.

But there are certain times where a single variable seemingly trumps all others.

Right now some people would say that variable is the Fed or interest rates. That might be true but I have my own unifying theory of what’s driving markets at the moment — money. People have plenty of it and nowhere else to put it.

Let’s not overthink it.

The reason stocks are going up is because people want to own stocks. So they keep buying stocks.

The reason housing prices are soaring is because people want to own homes. So they keep buying houses.

The reason bond yields remain stubbornly low is because people want to own bonds. So they keep buying bonds.

Individuals invest on a set schedule in their 401(k) or 529 or Roth IRA or Robinhood account regardless of valuations because people are living longer, interest rates are low and stocks offer your best chance at returns above the rate of inflation over the long haul. So they keep buying stocks.

Pension plans have obligations they need to meet. Many of them are behind on those obligations. So they keep buying stocks.

Young people were bored last year, finally have some disposable income and now have a bug for the stock market. So they keep buying stocks.

Ten thousand baby boomers are retiring on a daily basis. They have some $70 trillion in wealth and they need to protect some of it. Even though rates are at generationally low levels, high quality bonds still offer protection of your capital in the short-term. So they keep buying bonds.

Interest rates are even lower around the globe. That makes bonds in the U.S. look attractive on a relative basis to foreign investors and governments. So they keep buying bonds.

The government probably can’t afford to let interest rates get too high because of all the debt we’ve taken on. So they keep buying bonds.

The millennials are the largest generation in the United States. Much of this demographic is now reaching their early-to-mid-30s, a time when people begin to settle down. So they keep buying houses.

The pandemic set in motion a boom in the ability for many people to work from anywhere. People now have the ability to work remotely and not be tied down to the biggest, most expensive cities. So they keep buying houses.”

So, there’s a lot of demand right now for stocks, bonds and houses. But remember, no one knows where prices are going in the future. Yesterday the Dow suffered it’s largest one day fall since October. As of this writing today, it’s recovered more than 75% of it. If you think the markets are over-priced and in for a big fall, you may be right. Or you may be wrong. Consider the words of Ben Carlson.

“Of course, this can’t last forever. Markets are always and forever cyclical. Nothing ever goes up and to the right forever. It would be delusional to assume otherwise.

But if you’ve been yelling at people for years and years about fundamentals you’ve missed the fact that a tidal wave of money and demand for assets has trumped every historical metric in the book.

People have a lot of money right now and they want to buy financial assets with that money.”

Keep your plan in place and stick with it. Even when it seems tough to do.

Enjoy the Journey!