Why Is the Stock Market Going Up?
Why the stock market moves in general is complicated. But it also comes down to fundamentals: supply and demand. The more people want to buy stocks, the more their prices will shift upward. And vice versa.
People only buy stocks when they believe that the potential reward is worth the risk. So when they buy stocks, they are optimistic that they will see prices rise over their holding period.
With all of the damage to health and the economy, why would people ever think that prices would increase? Why is the stock market going up?
Why Is the Stock Market Going Up?
Some of this has to do with the government’s response to the crisis. If the government had never acted, the economy would be in complete ruins.
And this isn’t just referring to the United States government, but rather to governments around the globe.
The Bank of Japan has taken strong measures to combat the impact of the coronavirus. As has the European Central Bank.
And in the United States alone, Congress has passed $300 trillion worth of stimulus aid to the economy. This is money designed to help regular folks stay alive – and businesses, too.
But it isn’t just Congress that has been acting – it’s the Federal Reserve as well. Since March, for example, the Fed has unveiled measures to loan or borrow trillions of dollars of assets.
This has caused there to be tremendous liquidity in the stock market, stimulating demand and buying power. Which is part of the reason why the stock market is going up despite everything else happening to the economy.
Not All Stocks Are Going Up
There’s another thing worth taking into account. Stocks aren’t just increasing across the board. That means that stocks are going up due to more than just the Federal Reserve and Congressional stimulus.
Instead, investors are analyzing individual stocks and making decisions about future prospects. Here’s what I mean:
Not every business has an equal chance of surviving the COVID-19 pandemic nightmare. For example, grocery stores are staying open as essential services while restaurants have been forced to serve takeout or delivery only.
This means that grocery stores have a higher chance of survival than restaurants that rely primarily on in-restaurant dining.
Stay-at-home orders have forced businesses to close. Meanwhile people have been watching tons of entertainment programming at home because they have little else they can do with their time.
So not every company in the stock market is going up. This means that prices are rising in particular for businesses that people still think can perform well despite COVID-19. It’s not the federal stimulus packages alone.
Will the Stock Market Keep Going Up?
Of course, it’s always impossible to know for sure whether the stock market is going to keep going up. Market timing is notoriously more or less impossible.
However, there may be some reasons to think it will keep going up.
For example, as economies and more businesses open back up, the economic environment will be healthier. This should help stocks begin to recover even more as the economic engines get going again.
It’s also likely that there will be more stimulus packages from both the United States government and governments around the world, like those in the eurozone.
This is no guarantee that the stock market will keep going up. COVID-19 could take another turn for the worse. Oil may continue to be in crisis. Check out these top oil stocks and oil tanker stocks. Or other unforeseen events could occur at any time.
So What Should an Investor Do?
Given the uncertainty around whether or not the stock market will keep going up, what is an investor to do? The simple answer is: Smart investors should keep doing what they’ve always done.
Look for great businesses with healthy prospects. Analyze the fundamentals. Learn to recognize a company’s key metrics like strong revenues, low costs, healthy earnings and ample cash flows.
In the history of finance, investing in strong stocks has always been the way to earn outsized returns. Nothing has changed since COVID-19 hit.
In some respects, it doesn’t matter why the stock market is still going up. Or even whether it will keep going up. Identify the best stocks and keep investing, and in the long run, you are going to come out on top.
If you’re interested in more information on why the stock market is going up and which stocks are the best to invest in, make sure to sign up for the free Investment U e-letter in the subscription box below.
About Brian M. Reiser
Brian M. Reiser has a Bachelor of Science degree in Management with a concentration in finance from the School of Management at Binghamton University.
He also holds a B.A. in philosophy from Columbia University and an M.A. in philosophy from the University of South Florida.
His primary interests at Investment U include personal finance, debt, tech stocks and more.