Is the US headed for a stock market crash? At first glance, it appears that stock markets set new records each month, and there’s no reason to expect it to stop any time soon, as long as the American economy continues in its recovery mode. It’s a time when even the newbie can make money, reminiscent of the days of the early 00s, during the tech and housing bubble. But have people become complacent and forgotten that bubbles eventually pop?
The Fed’s Easy Money Policies
In an effort to repair the damage caused by the last stock market crash, the Feds have created two easy money policies to benefit the investor.
It’s been over six years, yet the US Federal government has kept short-term market interest rates at 0%.
But this wasn’t all they did in an effect to repair damage from the market’s early millennium fracture. They also made an effort in their QE—Quantitative Easing—programs. The Federal Reserve used trillions of US dollars to flatten bank debt, purchase treasuries, and other mortgage backed securities. This was all in an attempt to force long-term interest rates to remain low, and keep them there, in an attempt to keep cash flowing in businesses and companies.
The 0% short-term market interest rate, combined with the quantitative easing programs has increased the liquidity of national banks, resulting in lowered borrowing costs for them. This means that businesses and companies are able to borrow money, for very little cost.
Together, these two policies have let to what is called a clear stock market bubble. But how long can it be sustained, and when will it burst?
The Fed’s Money Policies and Impact on the Stock Market
In a true capitalist society, the best companies should be the ones who thrive, while the mediocre struggling businesses should shut down.
It’s based on a rewards merit system. You don’t make a profit—boom you’re gone. Society is all the better for it.
But with the Fed’s two favored money policies, the inevitable seems to have been delayed, for now. Their policy has turned the market upside down. Struggling and can’t pay your bills? No problem! The Feds have you covered!
These flexible money policies have allowed the floundering business to keep afloat. They have a constant source of cash, as banks lend to them in droves. Weak sales and a bad balance sheet? It doesn’t matter. A business can have an infinite source of funds, at low borrowing costs, for now.
It’s deceptive that because of this borrowed cash flow, these struggling companies can post stock market gains. These policies have led to frustration on the part of active investors who focus on the fundamentals.
In past years, only 21% of active mutual funds were able to exceed benchmarks, in the past five-year period. Can it make sense when all stocks increase in worth, regardless of whether they’re good or bad?
For now, even bad companies can stay afloat. But what happens when the endless source of cash from the banks runs out?