Darleen,
Here's an interesting point. People are making more money now because productivity is going up and prices are going down for most goods we use on a daily basis (with obvious exceptions like energy, but that can be said to be due to OPEC supply limitations and production quotas, both artificial induced shortages). Btw, I believe oil has reached a top and will decline from here.
So people are putting money in IRAs and 401K, as well as buying mutual funds and stock in their non-IRA accounts. If the markets fall and people feel less inclined to put their money into the market as retirement "savings", they will spend it. In essence, the asset inflation we see in a relatively few stocks may be a pressure release valve that offsets further physical demand for goods. Money not saved or invested usually gets spent.
Also, one other point. Even though we are currently seeing a bubble in the Nasdaq, the majority of all stocks are trading below their 200DMA, with the indices supported a relatively few big name, very liquid issues. This is primarily due to the proliferation of mutual funds, each seeking to maximize their returns, cannibalizing their portfolios and bidding up these momentum stocks to incredible valuations.
And why do they do this? Because in addition to charging expensive 12-b annual management fees, these managers also, I believe, are conpensated on the basis of their performance. So here we have these fund managers putting investor's money in increasingly fewer and more risky investments so that THEY can ensure they will get THEIR bonuses at the end of the year.
Well, now the value funds are being forced to sell off their portfolios to meet redemptions, the proceeds of which are being redirected into the even narrower Nasdaq tech stocks. And these Nasdaq fund managers are forced to buy the liquid momentum stocks that haven't broken down.
So if the market fails to perform for them, or people opt not to put more capital at risk until they see a bottom in the markets, why wouldn't they just take that monthly IRA allocations and just go out and buy stuff. (or pay off the taxes they'll incur from those mutual fund distributions they'll receive at the end of the year.
Regards,
Ron |
