It’s now been four years since the financial crisis of 2007-2008, and there’s still a lot of bad financial news out there. As the world’s economic slowest recovery continues, Main Street USA is still waiting for that happy day when things get back to normal.
For some, that day could be now. With the price of just one share of stock reaching a fresh 52-week high earlier this month, some small‑ and mid-cap stocks are up as much as 500 percent since the beginning of the year.
What’s behind this recent bout of stock market buying? Is it another wave of the financial crisis? Has the Federal Reserve finally stepped in and started to normalize interest rates? Has inflation really returned, as investors have begun to fear?
To find out, let’s examine the fundamentals behind the recent market surge.
Strong Earnings, Rising Demand.
One of the main reasons behind the recent run in the stock market is strong earnings. Lots of big-name companies reporting good news these past few months.
Last week alone, there were 26 companies that reported strong earnings growth, and 27 companies posted revenue increases. These are all positive signs that the economy may be on the road to recovery.
What’s also contributing to the uptick in the stock market is rising demand. Traders have been talking up stock purchases for months, and with active investors looking for high-quality cheap stocks to buy, the opportunity appears to be here. As the economy begins to pick up, investors are hunting for stocks that they feel will benefit the most from this economic activity.
Recovery In Some Areas, But Not In All.
While some areas of the country may be doing really well, that certainly isn’t the case for everyone. According to the U.S. Census Bureau, nearly 49 million Americans live in poverty. A lot of people remain mired in struggling with the economy’s aftermath, and that lack of economic progress is showing up in some surprising places.
Take a look at Las Vegas, for example. The Nevada city has been the epicenter of the real estate market since the beginning of the year, and more and more people are deciding to take the opportunity and run for the hills. As of early May, Nevada’s unemployment rate was 12.8 percent, more than double the national average of 5.9 percent. It’s the largest spike seen in Nevada since 1995.
Even more surprising is that Southern Nevada, where unemployment is usually lower, also had the highest rate of increase in unemployment. The opposite is seen in Northern Nevada, where job creation outpaced wage growth for the first time since the financial crisis. The Northern Nevada community, which was hard hit by the housing market crash, is still struggling to recover. It’s seen as a microcosm of the U.S. economy as a whole.
Inflation Still A Concern.
Inflation is also a major source of concern for investors. While the price of oil has plunged since the beginning of the year, the U.S. Federal Reserve has kept interest rates low to try and stimulate the economy. However, with the price of food rising and the cost of gas going up, investors are starting to grow worried about inflation.
In early May, the U.S. Federal Reserve announced that it would keep its interest rate target near zero percent through 2021, and many investors saw that as a sign that they should look for stocks that would benefit most from the Fed’s ongoing stimulus program.
The Fed’s Stimulus Program Is Working.
The U.S. Federal Reserve’s massive $4 trillion-plus quantitative easing program, which was launched following the financial crisis of 2007-2008, has been working, according to many economists and financial experts. It’s certainly not a perfect plan, as there have been numerous examples of poor economic growth, high unemployment and stalled real estate markets around the world as a result of the Fed’s easy money policies. But for the most part, the program has been a stunning success, and the Dow Jones Industrial Average has seen its value more than double since early 2019.
At this point, it’s fair to say the Fed’s quantitative easing policy has been one of the keys to the stock market’s recent resurgence, and much of the demand seen in recent months can be attributed to the fact that the Fed is no longer in a negative interest rate territory. When the Fed buys government bonds, it pays interest on those purchases, generating income that it can reinvest in more bonds and other equities. That income, in turn, fuels investment demand.
Looking For Alpha
The bottom line is that while the future of the economy seems promising, it’s far from certain that things will come good quickly or easily. For those looking to get in on the ground floor of the next big thing, now might be the perfect opportunity, in the right sectors, of course.
It’s important to closely examine the companies that you will be investing in to determine whether or not they are a sound investment based upon the current economic climate and your personal financial situation. Before making any serious money investments, you should consult with a financial professional who can analyze your personal situation and create a plan that fits your individual needs.