In the face of so many economic and demographic challenges many market participants find themselves questioning how much longer this spectacular multi-year stock rally can last. After all, earnings are not that great, unemployment is improving at a crawl and consumer spending is flat.
So why does the U.S. stock market keep going up? Is it the Fed's money "printing" alone that has caused the rise? Will the market drop like a stone when the Fed tapers?
The primary key to understanding this market is the amount of money that is available for investment. Money that is in the form of cash, backed up in the system. The majority of this money has yet to find its way into the functioning economy. The best illustration of this is the Adjusted Monetary Base Chart from the St Louis Federal Reserve Bank.
Looking at the chart above, it is not too difficult to see why the S&P 500 has roared past the highs set in 2000 and 2007. As long as credit continues to thaw and expand and the monetary base remains so vast, it is probable that stocks will continue higher.
Is there a bubble in stocks? Quite likely, but given the amount of money waiting to come in, the bubble could expand for some time even after Fed tapering starts.
Market corrections, such as the one we see at present, will probably contribute to the steady expansion of stock prices for some time. Of course, geopolitical shocks or unforeseen crises could pop the bubble but it appears currently that the status quo continues.