Let's talk about why the stocks keep hitting new all-time highs at the same time our economy is suffering, and how you can use this information to invest and grow your wealth. Enjoy!
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Factor 1: Momentum Investing
The rise of momentum stocks has most certainly made a lot of people rich over the past year or so, but it's also broken the bank for many others.
This usually happens when a bunch of retail investors get behind a stock and collectively agree to buy and hold. I think of this a bit like when you start to push a small snowball down a hill.
This is most effective when the hedge funds are betting against the stock, as it forces them to cover their losses, which in turn causes the stock to rise in price. This is like when the snowball picks up all the snow that has been laid in its path, and starts growing at an astounding rate.
In order for a situation like this to get started, it does require that initial push from investors and the right market conditions.
I have definitely noticed a shift in how people approach investing after experiencing the cryptocurrency market. People have been exposed to huge returns that make the average, 8-10% yearly growth from the stock market, almost laughable. However, most crypto coins are driven by hype and not real-world value like stocks, and now people are starting to invest in this way when it comes to the stock market.
Factor 2: The Tech Boom
FANG Stocks, which is an acronym for Facebook, Amazon, Netflix and Google, have clear advantages over traditional businesses. This just goes to show that even if the stock market looks like it’s doing absurdly well, it can be very misleading as certain sectors could be dominating.
The number of public companies in the USA has also nearly halved since 1996 when there were 8,090. With their being just 4,397 public companies in 2018. This means that the stock market is becoming even more distanced from the overall economy, as it doesn’t account for thousands of smaller private businesses that have been hit hard over the last couple of years.
Factor 3: Free Money
As we are all aware, during the illness, governments all over the world were giving out free money in the form of stimulus checks and furlough payments.
A recent study showed that 46% of people that received this stimulus, invested at least SOME of it, and 70% of the 46% invested AT LEAST HALF of it.
These new investors are more likely to turn to momentum stocks as they want to make the most from their money. This led to 24% of investors admitting they didn’t understand what happened with the Game stop situation, even though they took part in it.
On top of this, interest rates are still very low. This means getting money at a cheap price is easier than ever. Of course, if you want a loan, you’ll have to be accepted and deal with all the usual complications, but it's extremely appealing to borrow money at a low-interest rate and invest it at an average return of 8-10% and get FREE MONEY.
Factor 4: The Stock Market Bubble
The truth is, some experts believe stocks are in for a decade-plus of abysmal returns. Whereas others like Cathy Wood think the polar opposite of this and believe that due to all the fear about being in a bubble, we aren’t in one at all!
A reason for the inflated prices could be the increased demand caused by the illness. What I mean by this is during the illness, demand for certain products were massively inflated.
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