Equity Stock Climbs On Liquidity And "Wealth Effect"

Equity stock climbs to year high on liquidity inflow to stock market. As mentioned earlier, individual investors are watching closely on the sideline while there is a change in market dynamics. With the wealth creation effect of stock equity in existing portfolio, individual investors feel more comfortable with stock market and become more aggressive. Since there is only few willing sellers on the market, the newly created demand from investors turning bullish can easily push the market higher. The significantly increased trading volume indicates the appetite of investors with cash on the sideline waiting in the past months.

The return of interest in the equity of stock market by individual investors has just started. However, it is uncertain how long the buying interest will last. Individual investors have memory of the wealth destruction effect of equity stock. Although they will maintain original holdings for long term investment, they are very cautious on the new holdings which are acquired based on speculative trading. The strong buying demand on stock equity from individual investors originates from the Federal Reserve "quantitative easing" effort. As stated in the Yahoo! article "The Fed's big gamble: Here's what could go wrong". But it also motivates investors to move out of safe investments into riskier ones in search of better returns. The stock market, for instance, rises in value and everyone with savings in stocks feels wealthier. Ideally, it produces what economists call a "wealth effect": People who feel better off spend more. Many investors argue that it may create bubbles as hedge funds and other speculators borrow cheaply and make even bigger bets on stocks, commodities and markets in developing countries like Brazil.

On the other hand, some institutional investors have already accumulated significant profit from the rally and attempt to realize portion of profit at current level. There is possibility that market maker may use the opportunity and the lack of enough confidence from individual investors to drive down the market as a correction.

If the buying demand from individual investors sustain, market may advance further since there is little selling pressure. If buying demand drains up, market may move on a correction with profit taking selling from market participants.

Although short term outlook on market movement is uncertain, long term is optimistic as explained in earlier posts. There will be oscillations in the market but on the whole, market participants move in the the direction to reflect an improving economy.

"Is The Economy Actually Better Than We All Think?" Dan concedes that the economy is not growing as fast as it might be, especially at this stage of the recovery. (Normally, after a sharp recession, the growth during the first few quarters of the recovery is very fast, not the ~2% rate we've seen for the last couple of quarters.) But he thinks the economy will continue to grow, despite ongoing doom-saying and warnings about an impending double-dip. And below the wreckage of the housing market, he thinks the economy is fundamentally sound. We'll work our way through the remaining problems, Dan thinks, and, when we do, the economy will be stronger than ever.