Finance – What’s Driving the Market?


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Money Matters

February 20, 2023 by Scott Crosby

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Finance – What’s Driving the Market?

It has been a rocky road, but there can be no doubt that the S&P 500 trend-line has been gradually rising since its low-point in October (see graph).

S512-1.jpgAll the experts said the market would not recover for another nine months to a year – or more.  And that may yet be the case.

But a number of stocks are definitely going up in value.  Obviously, if you had bought those stocks in October, you could have sold them in December at a nice profit.  You could have bought stocks in the smaller dip in late December or early January, and enjoyed a nice growth in value by the first week of February.

What’s happened?

Two or three big factors are behind the market’s improving picture.

First, the Federal Reserve’s series of 0.50 and 0.75 interest rate hikes had the desired impact:  not too much, but enough to slow down the false façade of inflation-related price increases.  But such huge jumps may be ending:  in February, the Fed announced a rate hike of only 0.25 percent.  That is a significant change.

That reduced rate of increase showed the Fed’s previous hikes were working as hoped, and that the Fed is avoiding excessive hikes.  The market response was generally positive, and stock prices went up.  

Second, recall that this inflation was caused by two years of the Democrats’ deficit-spending – that is, increasing the money supply (something only the government can do) with no corresponding increase in economic goods and services (the government does not contribute to economic productivity).  

In November, the Republicans – no angels themselves, to be sure – won the election.  Democrats were unable to push one last tax-and-spend program any further before they lost their control of the House on December 31st.  

The Republicans took charge, and vowed to pursue a balanced budget.  No Congress has passed a balanced budget since 1922, but in so doing, at least, they are determined at this point to block any further Democrat spending that disregards the well-being of American citizens.  

S512-2.jpgThe government is hobbled – “mired in politics” some will say.  But that is a situation which has often been regarded as good for businesses and citizens.  It prevents either political party from pushing a problematic agenda.

So it is not really a big surprise:  with the government out of the way, the stock market has begun to show signs of a “recovery,” of sorts.  It is not a strong recovery, but a tentative one.  Still, it is clearly not a decline.  

The recovery is happening because America’s businesses for the most part have survived the recession in good shape.

The Fed cannot do the job of turning the economy around all by itself, of course.  But without a Congress or President able to call for a “stimulus package” – a euphemism for more deficit spending – the government is forced to sit on the sidelines. 

Stability

Economic growth simply means more productivity and more growth by and for everybody – businesses and wage-earners.  

And nothing is better for economic growth than the government doing nothing to interfere.  Businesses are more successful in economically-stable times.

Economic growth for businesses includes spending more money on innovation and product development – not only for large companies, but also for small startup businesses, even including someone working from home, or a mom-and-pop store opening up on Main Street.  

All of them must do a better job, sell a better product, provide better service, and be better at advertising what they have to offer, in order to make more money – in other words, to experience economic growth at the personal level.  

Multiply each individual’s economic growth by the many millions of businesses of all sizes in the U.S., and the hundreds of millions of people they must hire in turn, to make it possible for the country as a whole to experience economic growth.  

The complexity of economic growth

In the early stages of recovery from a recession, growth is not across the board, but is limited to specific companies for limited periods of time.  Large or small, they are the first harbingers of a delicate, tentative foothold for continued, general economic growth for the country as a whole.  

That is, of course, as long as that growth is not disrupted by further government interference.

Those small footprints of increased productivity require the first increases in the purchases of goods and services.  Economic growth feeds on itself, spreading the momentum to those other companies, who repeat the process in turn, until the whole country – and even the whole world – is once again involved.  

The whole world?

In centuries past, it was said, “All roads lead to Rome.”  The Romans built a network of roads to support the movement of the Roman legions which preserved the peace and defended against invasions. But those roads became the routes for trade caravans as well. Roman roads were well-engineered and solidly constructed, and lasted throughout the thousand years of decline of the Dark Ages.  Many were ultimately developed into the highways of modern Europe today.  

Thanks to its freedom, the U.S. is the financial center of the entire world.  More often than not, it is private U.S. initiatives, paid for by private corporations, that are responsible for, or at least substantially involved in, economic development beyond U.S. borders. So, as goes the U.S. economically, so goes the world.

Two thousand years ago, the political domination of Rome, and the wealth that resulted from Rome’s political conquests and domination, led to the saying, “All roads lead to Rome.”

In today’s world, the freedom in the U.S., the lack of political control in the U.S. (especially in contrast to the lower levels of freedom and the higher levels of political control in any other country), and free enterprise – Capitalism – is the foundation for nation-wide and world-wide economic development – and everybody’s well-being.  

American freedom is what makes it possible to say that “All financial roads lead to the United States.”■

 

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