Stocks soar Wednesday morning: What does it mean for you?

This morning, the major central banks of the world have announced a joint effort to allow European banks to have greater access to U.S. dollars.

The European Central Bank can now borrow all the U.S. Dollars they need, thanks to an overnight agreement with the U.S. Federal Reserve Bank.

In addition, the growth of private sectors jobs in November rose by over 206,000 jobs.  This kind of job growth normally leads to a drop in the unemployment rate.

In normal economic conditions, these announcements would be interpreted as “no big deal.” In reality, if European Banks need U.S. dollars, their own currencies are in trouble.  This is the first time in many months that more people have found jobs in a struggling U.S. economy.

But this morning, all news is good news!

Prior to today, every stock market investor who was motivated to sell their stocks had already sold. The only people left holding on to U.S. stocks now were not going to sell at these low price levels. These investors were either not paying attention to the falling stocks markets or they did not care how low stock prices fell.

Today, new buyers for U.S. stocks have emerged. When new demand comes in, it does not make any difference how the world wide economic headlines are interpreted.  The worries about Europe, banks and U.S. unemployment quickly fade away.

When the demand for U.S. stocks overtakes supply, stocks prices will go up. When new buyers jump into the stock market, every Minnesota 401(k) company retirement plan participant you know will finally “make money” in their company retirement plan account.

As much as the so called financial experts want to lead you to believe that the stock market is a super sophisticated universe with its own rules and hidden forces, it really is not. The prices of U.S. stocks follow the basic law of supply and demand. 

There are numerous economic examples of the battle between supply and demand all around us in everyday life. 

When the supply of homes for sale increased, the demand for homes went down which lead to lower home prices.  When the demand for companies hiring new employees dried up, the supply of workers looking for a new job (unemployment rate) rose. When the demand for businesses that needed to borrow money slowed down, interest rates dropped to historic lows.

In each one of these examples, a drastic change in the supply-demand relationship caused an equally drastic change in the price.

The stock market goes down for only one reason; there are more sellers than buyers of stocks.  The stock market goes up for only the opposite reason; there are more buyers than sellers of stocks.

Stock market prices follow the same economic forces as every other commodity, good or service.  The price of everything is controlled by supply and demand.  Learn how to apply that basic law of economics to the investment management of your company 401(k) retirement plan.

Ric Lager
Lager & Company, Inc.