Markets Follow The Law

Markets, like the humans that power it, are subject to the laws of our universe. Do you remember Newton’s first law? An object at rest will stay at rest, and an object in motion will stay in motion. That object will maintain a constant velocity unless acted upon by an unbalanced force. Consider this, before COVID hit, the stock market was screaming higher with no end in sight. All the technical indicators and fundamental signals were forecasting a coming decline, but the stock market just kept on rising to all-time highs. Investors continued to drive prices higher prior to the pandemic.

Covid Breaks Market Momentum

After the stock market crashed in 2020, investors and the public had no idea what the future would hold; The economy was in disarray and the public was terrified. Because of this, stock market analysts were sure that the stock market would remain weak for some time. However, that wasn’t the case at all. Since the stock market reached its bottom on March 23, 2020, it has gone straight up and more than doubled to date. There wasn’t an analyst to be found who believed the stock market could complete a V-shaped recovery. Not only did it do that but there was never a retest of the low like many believed there would be.

Markets, like the humans that power it, are subject to the laws of our universe.


Why Is The Stock Market At All-Time Highs

What is fueling this historic rise in the stock prices? Why hasn’t it stopped yet? Newton’s first law. An object in motion will stay in motion unless acted upon by an unbalanced force. The stock market needs short sellers that are more enthusiastic than buyers.

stocks for beginners blacks swan
Black swan event – term for a very seldom event with a major effect often resulting in a stock market crash. One black swan within a swarm of white swans.

Stocks Fueled By The Federal Reserve

Here’s the thing, not only was the market set in motion to the upside by bargain hunters on March 23rd 2020, but the general public joined the bargain hunters with a ton of free cash distributed by the government and Federal Bank. In the absence of an opposite force, the upward momentum was pushed along by trillions in stimulus money. If you’re wondering when the stock market rally will stop, there’s only two ways.

Stop The Stimulus, Stop The Market

The first way is to stop the stimulus. Even if there is moderate fear out there, it will not be enough. As long as money is being pumped into the economy, the opposite force (fear) will not be enough to stop the upward momentum. Remember Newton’s first law. After you stop the force behind the momentum, then an unbalanced force of pessimism needs to counteract the optimism among investors on the bullish side of the stock market. It should be no surprise that short sellers are afraid to sell stocks and buy puts, the Federal reserve and Federal Government are back-stopping the markets, after all. If the money faucet gets turned off and a moderate level of fear is introduced, that may be enough to stimulate short sellers to re-enter the stock market and slow this rise.

Black Swan

The only other way to stop the stock market from continuing higher is a huge and cataclysmic event. That’s what COVID was, in effect. This is what is referred to as a Black Swan event. A Black Swan event is something that was completely unforeseen and very impactful.

As earning seasons starts wrapping up, it would seem that the only thing left to stop the stock market from going higher is a huge global event. The Delta variant, however disruptive and unfortunate, is not enough. Moreover, another stimulus package just got passed to cover American infrastructure. That’s more money being pumped into the system.

The stock market will keep going up unless we decrease money supply and moderate fear is introduced, or there is a Black Swan event that has a global impact.

Bottom Line

We closed at another all time high last week. Right now, there is nothing standing in the way of prices to continue their upward climb. And, if you look at the entire history of the US stock market, it has only gone up. So, if you’re a long-term bull, there are a lot of reasons to be long the stock market today.