Where Does The Stock Market Go From Here?

In the last post, we covered how the market has performed the past six months. The next question was: How does the stock market move up from here? The answer to that question consists of two parts.

The first part has to do with the government. As stated in the last post, the government is currently propping up the economy with lots of financial aid. In other words, the stock market is on government life support. If the government were to remove its intervention at this very moment, the stock market would most likely suffer a setback. Therefore, the stock market will only truly regain momentum when it is able to stand on its own again without government support.

The second part has to do with the American consumer. As stated in the last post, consumer spending hit the skids when the economic crisis began, forcing companies to slash costs to maintain profit margins. The value of a stock will only increase if profits increase. Since companies have already cut costs to the bone, the only way to generate increased profits is to generate increased revenues. Therefore, companies need to get the American consumer spending again.

Both parts of the answer are quite straightforward. However, when those two parts are achieved is the bigger question. The Federal Reserve and Treasury Secretary have testified before Congress that they have yet to figure out when and how their exit strategy will work. And nobody knows yet whether the American consumer will return in full force or whether they have changed their spending habits for good. In other words, your guess is as good as anybody else’s.

I know a lot of you out there, myself included, hope that the stock market rebounds quickly. However, until both parts of the answer have been addressed, the stock market is not likely to move anywhere, up or down. Unfortunately, that might be quite a long time.