Where Are We? A Market Overview

If you are new to this market you will need a quick crash course on where we are and where we have been over the past 3-4 years. It is very important to understand what has happened in the recent past if you are going to be managing your own savings. Knowledge of the worlds economies is very helpful in identifying possible trends or pitfalls along the way. So lets get started!

Unless you have been living under a rock for the past 5 years you will know that America went through a fairly severe recession. Which included a large stock market crash that coincided with the collapse of the housing market. However since that crash the stock market has rallied over 100%! Most people who don't follow the markets and only listen to the news may be surprised to hear that fact. What that essentially means is that if you had invested your life savings in the stock market in 2008 you would still have roughly the same amount of money here in 2012. That is unless you panicked and sold everything near the bottoms (which is most common for individual investors to do) you would still be on fairly level footing as America is beginning to pull itself out of the recession. We will get into investor psychology later in our studies, but the point is that America has started to come back; housing is recovering, unemployment is improving and our stock markets are approaching all time highs.

These recoveries rarely happen on their own and this time is no different. Since the crash in early 2009 the Federal Reserve Bank of the USA has engaged in a massive stimulus program that has aided in the stock market recovery. Whether this has helped the actual economy is up for debate but as investors we rarely care why something is happening, we simply need to be prepared to take advantage of the opportunity in front of us. This stimulus program goes by the phrase "Quantitative Easing" or "QE" and basically means that the government has been printing money and purchasing bonds and other types of securities (stocks, bonds, mortgage loan packages). The purpose of this "easing" is to make money cheaper for lenders and theoretically provides free cash to be put to work in the markets, creating higher stock prices.

The reason we focus on this policy by the Fed is that it is the primary driver of our stock market recovery over the past 3 years and their actions are what we need to focus our attention on (for now). Since 2009 we have had several of these easing packages QE1, QE2, Operation Twist, QE3, and the latest going into effect in January 2013, QE4. The reason we care about these operations is this:

   Needless to say there is quite a correlation between the Fed stimulating and our market going higher. It is not very important that you understand exactly what they are doing, however it is very important that you follow along and listen to what the market is telling you. And if its not clear to you yet here it is: DON'T FIGHT THE FED! As long as the Fed is stimulating the markets and the economy, you should be investing along with them. Period.

There are structural (fundamental) reasons our economy has improved lately as well. Since the crash in 2009 the unemployment rate in the US has dropped from 10% at its highest down to roughly 7.7%. Which is the lowest unemployment we have seen since the recession. Employment is very important for the health of our economy being that we are primarily a consumer based economy. Which means that if people are not working, they are not buying things. If they are not buying things then business will struggle and therefore have to lay off more people, making the problem worse. So the unemployment claims are very important to follow as an investor.

Another important factor helping the economy and confidence is the fact that housing prices have begun to  improve. It is a very good thing to see in a recovery when the primary driver of the collapse (housing market) has begun to turn and go higher. Part of the reasoning behind the housing rebound has been due to interest rates on loans are near all-time lows. This encourages people to take out safer loans and allows them to afford a new house or refinance their existing mortgage to a more affordable rate.

Basically I can sum all this up for you in a few lines:

1. Don't fight the Fed...If they are stimulating you should be buying stocks
2. Watch Unemployment. Jobs cure all in a consumer based economy
3. Housing seems to be rebounding and creating more confidence in the recovery
4. Despite political squabbling and tax fears, the US markets are within 10% of their all time highs (this is a strong signal)

This is merely a commentary on the market recovery and some of the general reasons behind it. This is a simplistic view of a very complicated system, however you will find through our journey that the simple solution is most often the best. If you understand these basic concepts you will be building a solid base to continue our studies into the markets. Feel free to ask me any questions you may have in the comments section below and I will look forward to our next discussion which will involve how to begin to pick out some stocks that we will want to follow.