I have said it before on this board, and I’ll say it again…there is a lot of excess capital out there, and now that even morons understand that residential RE has clearly peaked, the money is getting plowed into the markets instead of housing. And there’s still plenty of room for more plowing. To quote a statement made in the flimsy Q3 report from one of my mutual funds:
“The U.S. consumer has a record $5.8 trillion sitting in money market funds and savings deposits. This is 50% higher than 5 years ago – at the peak of the last boom.”
Note that since the NYSE and Nasdaq have a combined capitalization hovering around $25 trillion, $5.8 trillion is not an insigificant amount of capital.
I worry that all the doom and gloomers are going to continue getting a lesson in the power of this money supply. The reason Wall Street gets excited by the interest rate pause is that it keeps fixed investments from being too attractive, promoting the flow of this capital into the stock market. If inflation and the dollar behave themselves, the FED won’t have to raise rates further, and stocks will continue to look attractive (even if the housing sector stinks). If rates go up further, all bets are off, since a fixed return that beats inflation starts to look too good to Mr. and Mrs. Risk Averse.
My prediction: The U.S. stock market will continue to do well over the next two quarters, unless interest rates are raised unexpectedly.
Why? With all the upward pressure from available capital, I don’t see a big drop in the U.S markets until corporate earnings stink it up. Earnings were good this time around, and it’s not likely they will be poor over the next two quarters given that oil and gas will be cheaper y-o-y.
Pretty simple explanation. Hopefully I’ll be like Eddie Murphy in Trading Places and get it right…:)
