Ten Factorial Rocks - Markets continue to rise despite a headwind of bad news.
Why has the stock market been so resilient in 2023? Despite inflation woes, a bank crisis, international wars, and spreading layoffs, the markets have been stubbornly resilient so far this year. So what is the reason for the markets uptick while the world around it continues to burn?
The Pain Trade
The Pain Trade is an investing concept that says that the markets will deliver the most amount of pain to the largest amount of people from time to time. Pain trades occur when an investing space becomes crowded. A good example would be the large number of investors long on real estate before the 2008 financial crisis.
So, what does the pain trade have to do with the markets continuing to push higher? If you believe in the concept of the pain trade, then it is currently punishing investors who remain on the sidelines with bearish outlooks by pushing the markets higher. This sort of links to an old Warren Buffet quote that says to be buying when everyone else is selling. The minority is currently being rewarded.
There are wide expectations of a looming calamity, but so far it has not come to fruition. Investors have shifted from waiting for a decline that never happened to chasing gains as they wait for disaster. The shift is helping to push markets higher and essentially causing the opposite of the expected result to occur.
Despite mixed reports and often negative news, investor sentiment has been on the rise as markets have failed to collapse and expected.
Credit Stress is Contained
According to JP Morgan (NYSE:JPM), there are a few reasons why the markets have held up this year. The first is the containment of credit stress.
They state that many borrows and businesses locked in long-term low rates before interest rates started marching higher. This makes a lot of consumers and companies immune to the recent spike in rates.
Excess Cash
Another reason for market resilience is the huge cash stockpiles that consumers are holding. There is over $1.2 trillion sitting in money market funds as investors take advantage of higher interest rates. This huge backdrop of cash is helping to prop up bonds and equites.
Equity Risk Premium
The equity risk premium is the excess return earned in the markets relative to risk free investments. The rise in rates has made risk free investments like interest bearing accounts and CDs attractive, but it currently still makes sense to take on risk for higher returns in the market.
Conclusion
Why has the stock market been so resilient in 2023? The pain trade is an interesting concept that almost seems to be causing an opposite market reaction of what is expected. There are also some fundamental factors helping to prop up the market. Containments in credit stress, excess cash, and risk premium are helping to keep the market afloat this year