The Power of Liquidity

A rare event in the financial markets occurred yesterday.

For the first time in years, three major market indices all hit new highs. The Dow Jones Industrial Average, The Dow Jones Transports and the Dow Jones Utilities all hit new record highs yesterday. This is extremely bullish action for the big stock averages.

My readers are undoubtedly aware of my concern for stock markets that rise while the economy lags. I continue to believe we have plenty to worry about: Falling U.S. home prices, increasing personal and government debt, a huge trade imbalance, the pressure on the U.S. dollar, a negative personal savings rate and more.

But money talks: My readers are also aware of my belief that too much money in the global marketplace is chasing too few investments these days. There is an immense amount of wealth (much of it inherited) and plenty of money in private pension funds and financial institutions chasing very few investments.

The “trend is your friend” has always been my motto when it comes to investing. Fundamentally, investments such as stocks are trading at historical highs. Would I be surprised to see stocks crash in price? No. And I expect it will happen soon, as the economic environment in the U.S. continues to weaken.

But for now, we are simply witnessing the power of liquidity in the stock market. It’s just Economics 101 — greater demand (fuelled by plenty of liquidity in the system) chasing a diminishing supply (so many public companies are being taken private or merged) will continue to result in higher prices for the market for now. In a nutshell, the raw power of liquidity we see today and a strong rising trend (as we witnessed yesterday from the main stock market indices) is a combination a betting man like me would not bet against.

Just keep in mind: The markets are a good place today; but, the higher investments rise, the lower they will fall when regression to the mean occurs. While I expect the stock market to continue rising in the short term, I still see a lot of similarity today to what happened leading up to the crash of 1929. Back then too much money was chasing too few stocks, as well. Prices just kept rising, speculation entered the market place, economic reality then set in and the rest is history.

Enjoy rising stock prices now while we all can!