Though many seem optimistic about our economy, we may be in for a big bubble, and one that keeps on building up.
(Please bare in mind that this post is only describing a theory I have about our economy. Please don’t take this as serous financial advice! No one can truly and safely predict the economy, or the stock market.)
I have been making an interesting observation lately. From looking at the media, people’s voices, or even different economic charts, I have noticed that many people are thinking that the economy is doing great, and will continue to. I will not lie, the economy is doing fairly well and has recovered dramatically since the 2008 recession. GDP is at a healthy rate, also unemployment is very low. However, history repeats itself, and it doesn’t make sense economically in my opinion for the stock market to continue to go up much longer.
The stock market seems way overvalued, and I question why it has seen such a drastic growth over the past several years. It’s necessary for the stock market to correct itself every once in a while, but my theory is that if you wait too long for it to go down, it can have major consequences on businesses, and the economy.
Here are 3 factors that I believe are making the stock market continue to go up in the short run, but keep on postponing a market correction, and will lead to a terrible recession…
1. Federal Interest Rates Remain too Low, Possibly Overheating the Economy
Considering how low-interest rates have remained, being at only 1.5% percent now, and even lower not too long ago, I think this may be contributing to a the stock market becoming too overvalued, with possibly too much growth in lending and borrowing to businesses. It also isn’t good news if you don’t have much elbow row to decrease the Federal Interest rates to bring back economic growth, when there is a recession.
2. The Rich are Getting Richer
So why do I think that rising inequality would lead to too much short-term growth in the stock market? Well consider this… The wealthy have a large amount of their assets invested in capital markets. As they continue to have a larger share of the economy, that means more money is put away in the stock market and other investments, again leading to this short term growth in these investments.
3. Recent Tax Cuts to Big Corporations May Help Bring Their Stocks Up for the Final Stretch
Since congress recently passed big tax cuts to large corporations, this may give more short-term growth to larger businesses, thus they will hire new people, invest more, etc. This could also lead to bigger paychecks to the top, as well as more room for companies to buy their own stock, which they will likely cause the stock price to go even further up for the short run.
If my theory is true that different factors are preventing the stock market from having a correction when it should, and it keeps on going up and up, This will be a devastating shock to the economy when it crashes. Considering big businesses take up a large portion of our economy, and since they are able to hire people, and expand out largely due to their market capitalization growing, if the market capitalization takes a big cut for many businesses, that isn’t good.
I have a theory that the bigger the drop in the stock market during a recession, the more dramatic it is for businesses, causing many to be laid off, many businesses to stop growing, etc. If it’s a much larger then normal bubble then in most recessions, then I sure hope we are all prepared. Don’t forget many baby boomers are retiring, and so now is a bad time to have a huge market crash. Also during a recession, people tend to consume less, so that hurts businesses even further.
Yours truly, from a 17-year-old arm-chaired economist! 🙂
(Update: From what I have learned about the way the stock market works, the majority of stocks that are being traded are on the secondary markets. That means that the stocks are traded between private individuals, thus not really being connected to the growth of a company. I higher or lower stock price doesn’t necessary lead to a higher or lower amount of revenue a company has in order to hire more workers, invest in physical capital, etc. Therefore, if the stock market had a major downfall, it wouldn’t necessary effect businesses as badly as I said before.)