Playing Stocks in a Slow Economy

In a slow economy such as in the US at present, the stock market behaves in a characteristic fashion as follows:

The volumes of stocks traded are usually medium to low. Because disposable incomes remain stagnant, public participation remains at a relatively low level. The traders mostly come from high income groups or investment firms which own large amounts of shares.

A slow economy does not mean the absence of growth companies. They are the stars of the market when their performances exceed expectations. Of course they don’t receive as much hype as when the general market is hot.

Since public participation is low, the high flyers cannot remain high for too long even though their performance is great. There is simply not enough cash injected into the market. Thus the big players have to “rotate” their investments to keep the market rolling. This means selling the high flyers to generate cash to buy the lower priced stocks that appear to have potential. The rotation of stocks sustains the market until a better time comes along.

A slow economy does not mean no record breaking. In fact, the Dow and the S&P 500 have been breaking records for many months now. Record breaking may be fake for the indexes only contain a limited and selected number of stocks, especially the Dow which consists of only 30 components. However, it is the best way to attract public attention in order to attract more cash into the market from small players.

The stock market in a slow growing economy is usually a good one that lasts relatively longer. Why? Short of a recession, the stock market is vulnerable to inflation for it causes the Federal Reserve to raise interest rates and restrict the volume of money in circulation. Inflation usually accompanies a fast growing economy, not a slow one. A fast growing economy cannot last too long because it will create bubbles in many sectors that can easily lead to inflation or bubble burst.

So, the current stock market in the US is moving on steadily in a slow-growth economy. The indexes will continue to break records. Funds will be rotated frequently to generate cash to boost the market. This causes the high flyers to come down for no apparent reason and some other mediocre stocks to go up. In other words, there will be volatility, but it will fluctuate within reasonable limits.

July 2014

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