Over the past six months the market has been rising and I have read a lot of article on why people think this is happening. Some analyst think this is an over reaction to good news and that the market is going to take a big hit soon as a corrective measure. As a note, today the market is down about 0.80%. This view of how the market is over valued is completely wrong for many reason.
Analyst are looking at market GDP as an indicator of the stock market which is very flawed. This flaw is due to the Keynesian thought process which is wrong in more ways than I would like to talk about in this post. The reason the market took a hit today is because the market didn't add as many jobs in the private sector as the analyst predicted (http://www.latimes.com/business/money/la-fi-mo-adp-jobs-economy-20130605,0,2964130.story). This argument of unemployment is why some analyst have been predicting that markets have over reacted to good news and that the markets will correct downward. The problem is these analyst haven't been looking at corporations at a micro level and then figuring out how this effects the market and the economy.
The real reason that the market has had an upward trend is due to increased productivity. Increased productivity leads to an increase in GDP and many other measures but it is important to note that productivity is far more important than GDP. Since the credit crisis many people were laid off meaning that unemployment has gone up. These companies first took a hit since people didn't have money to spend. As the market started to recover and many Americans started to increase spending regardless of employment due to the stimulus and social programs. These companies started to streamline their processes and got more efficient since they had fewer employees and an increase in output. Basically these companies have learned to run their business with less employees which has led to an increase in productivity. Productivity meaning that the ratio of employees to units produced as decreased.
This increase in productivity has led to the need for less employees which means unemployment rates will remain high. The unemployment rates will change once the demand for goods and services grows enough to employee these people or until companies get lazy again and become more inefficient. The bottom line is that companies are reducing costs in comparison with revenue which is leading to higher returns on their stock. Since many companies are experiencing this trend it is making the market or at least the indexes such as the S&P 500 increase as a whole. The market will fluctuate over time but the long-run (the next 1-2 years) will have good returns unless more manipulation on behalf of the government we currently have forces companies to make inefficient decisions.
As a side note many people are predicting another market crisis in the next 5 to 10 years which I would agree with as long as the government and Keynesian ideas continue to dominate. This upcoming crash will be due to poor policy and over regulation which has been the causes of most if not all of our financial crisis.
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