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Why Does the Market Keep Going Up?

This is the question I’m most frequently asked. Second place goes to “How Long Will the Market Keep Going Up?” I can give you a reasonable explanation for the first question; I have no clue about the second question (although the answer to the first question is a hint). Our country and the major corporations listed on stock exchanges thrive when the economy is fueled by spending. 

There are three principal forms of spending:

  1. Government
  2. Corporate
  3. Consumer

There’s also a “fudge factor” of Net Exports that can either be positive or negative. The collective result is defined as Gross Domestic Product (GDP). With the outbreak of COVID, everyone was logically concerned about the negative impact on Corporate Spending and expected the economy to come tumbling down. Fortunately, that’s just one leg of the stool.

The chart below shows spending for the most recent quarter, which is characteristic for what has happened for the past year – Government and Corporate Spending, along with Net Exports have been negative. Consumer Spending has gone ballistic.

Bottom Line: Consumers have been spending money like drunken sailors! Based on changes in alcohol purchases, this may be an appropriate portrayal.

Consumer Spending

Last quarter GDP rose 6.5%; Consumer Spending rose 7.78%, while the other factors declined. Much of this Consumer Spending growth is a direct result of two things:

  1. Various stimulus packages that provided funds
  2. People being isolated at home and getting bored. They’ve had more time to focus on ways to improve their life during the pandemic.

The result was the boom in Home Improvement, Nursery and Gardening companies, Food and Grocery Delivery, Alcohol purchases and Mail Order companies. I suspect that this behavioral aspect will be carefully studied in years to come.

So, you may now infer the answer to the question “How Long Will the Market Keep Going Up?” – until consumers quit spending like drunken sailors!

Rick Adkins, CFP®, ChFC, MBA

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