Bull Market in a Bear Market—Why Stock Prices Are Going up

What a difference six months makes. Last summer, investor sentiment was so bad

that stocks were selling off on good corporate news. Now everything seems rosy again. The

stock market is going up, commodity prices are strong. All an investor has had to do over

the last six months is just own the market. So why are things rosy on Wall Street and only

mediocre on Main Street?

The answer lies with the Federal Reserve and the central bank’s policy to keep the world

awash in cash and interest rates artificially low. This helps Wall Street much more quickly

than it does Main Street. Traders and investors would rather place their bets on stocks over

real estate. It’s all about liquidity and the ability of investors to trade within it.

Eventually, though, the central bank is going to have to reverse course. It can’t keep

pumping up the system forever. The hope among monetary policy makers is that the economy

will be strong enough to grow on its own and then the Fed can withdraw some stimulus without

negatively impacting the economy. What’s holding the central bank back from raising interest

rates right now is mostly the employment situation. The job market isn’t healthy enough yet

for changes to the monetary policy, but the stimulus is creating price inflation on Wall

Street (stocks and commodities). It’s not yet happening on Main Street (jobs and income).

So, we have a situation where the stock market keeps ticking higher, even in the face of

major uncertainty in the Middle East. Institutional investors are happy to buy stocks,

because corporate earnings are growing and interest rates are so low. It’s a perfect world

for Wall Street and there is a lot of hope out there. Investors are buying stocks based on

those hopes and it’s the typical move: buy on anticipation, sell on the reality. The

reality, however, has yet to reveal itself.

The stock market is due for a major correction, but it needs a catalyst. So far,

geopolitical uncertainty has proven to barely affect sentiment. Even lackluster employment

numbers and flat housing prices can’t dent investor enthusiasm at this time. We have a bull

market in an overall bear market, and it’s all because of the Fed.

Large-cap indices should continue to do well over the near term, because so many of these

businesses are well diversified internationally. Asian operations are providing the growth,

while European and American operations are slowly improving.

The right shoulder on the S&P 500 Index continues to form and it’s eerily similar to the

left shoulder. Pull up a long-term chart on the index and you’ll see an amazing pattern

that’s very symmetrical. It certainly leaves you wondering what the next major price trend

will be. Whatever it is, it will be due to inflation.