The stock markets continue to climb the wall of worry. With so much bad news out there, it doesn’t seem possible that markets can keep trading higher as they are. Many are calling it a false economy because of government stimulus and a bubble as assets get overpriced. But it is not the case and here is why we will see this market continue to new highs over the next 3 to 5 years.
We have entered into a paradigm shift in the economy with exponential growth potential. Technology lead by AI is spurring many innovations with drastically reduced costs. Government stimulus have indeed helped to keep the economy alive. The Biden administration “Go Big or Go Home” mantra backed by $1.9 trillion in stimulus, most likely by mid-March, will add a lot of fuel to an economy that is already doing well. It is not a current false economy. Most indicators show it as doing well. Add in vaccines, and we will see other hard-hit sectors start to run again, such as the service and leisure industries. The economy will be on fire here shortly.
M2 money supply growing by 25% has put a lot of money into circulation, showing up and driving assets like housing and stocks higher. Fed Chairman Powell is saying, “Be careful not to exit too early.” Feds want to have inflation more significant than 2%. When we see inflation surge, the Feds won’t flinch.
The last year was deflationary, so year over year comparison will be skewed. This year’s prices compared to declining prices will not show underlying high inflation. But the Feds want strong inflation anyway to monetize the debt they have incurred through the pandemic. So their position will be very accommodating.
There will be two forces at work, favorable deflationary pricing driven by new technologies that will spur new jobs and exponential growth. This positive trend will be offset by damaging inflationary pricing as old industries try to sell their goods at any cost.
Commodity prices are high here as the economy recovers, but it is not a bubble. The economy is growing, and as such, trade deficits should decrease as we get back into a shift to the service industry. The employment numbers are still mixed, that is for sure, but it is doing much better than many believe. As we know, the housing market is on fire, capital spending is strong, and inventory numbers increase as businesses try to catch up to demand.
All of this growth is pointing toward significant profit growth for companies. Strong markets will reflect this growth. Furthermore, we see savings rates at around 20%. That is a lot of money for consumers to tap into, further driving the economy.
Driving the paradigm shift will be Artificial Intelligence (AI). Its effect runs throughout every industry. Coupled with that is the sharp reduction in the cost of batteries, brings costs down across the board. One of the biggest beneficiaries is the EV sector. I recently read that EV cars will be priced significantly lower (and be better) in the next five years than gas-powered vehicles.
With all the newer AI and faster computing, costs are dropping dramatically in the AI field. It is leading to a creative explosion. So as old industries die, new initiatives spurred by AI will create significant employment prospects. This new automation will create more jobs than are destroyed.
So, be ahead of the curve and continue to aggressively acquire good companies in hot sectors such as EV, Genomics, AI, and financial services developing digital wallets. Now is a time to be bold. It is not a bubble but just the beginning.
Source: 1. Yahoo Finance. Fed Chair Powell: 'Be careful not to exit too early' on easy monetary policy. Brian Cheung. January 14, 2021. Accessed 2/9/2021.
About the Author: Bob Knight is the Founder and President of TurboTrading.biz, a community for trader education. As TurboTrading’s Day Trader Chat Moderator, he draws on his 30+ years of experience in the markets. Bob’s trading and corporate experience, and Master of Business Administration (MBA), give him deep insight into how markets function and how traders think. Bob is the author of countless SEC documents prepared for public companies. Therefore, he can guide TurboTrading members through trading documents and garner essential information quickly and easily.