Until you got to this tax and spending deal a year ago, it was one of the most hated bull markets. The markets steadily climbed one wall of worry after another, and the problem was that the economic data did not confirm it.
That’s right. The market was not rising for the past ten years due to a healthy underlying economy. On the contrary, the market was rising due to the Federal Reserve pumping out stratospheric amounts of thin-air money, all of which needed somewhere to land.
It was targeted by the Fed to land in stocks and bonds. Their goal, stated long after the fact, was to create a strong economy by what I would consider a reverse strategy of inflating money supply in order to pump up stocks in order to create a wealth effect that would cause companies to expand and people to buy more, etc.. The plan was that wealth would spill backward into the economy, rather than wealth emerging out of a strong economy.
The plan was nuts.
One of the beautiful ironies of this whole situation is that in 2018 you finally feel like the economy is normalizing to what we knew before the crisis.
By 2018 the wealth effect appeared to be finally working, but mostly what was working in 2018 was the new tax gift to the rich. The corporate tax cuts in particular made companies lookmuch more profitable by improving the bottom line because “earnings” are calculated after taxes. So, it appeared profits were soaring because of corporate economic vitality. In addition, stock buybacks made earnings-per-share look better still because the increased buybacks reduced the number of shares over which the earnings were distributed.
It all looked great on the surface. Employment was historically low, and we started the year with housing prices in many areas well above housing’s pre-crash peak. This created the illusion that the economy was percolating along splendidly … just as the Fed had planned.
And then it wasn’t … because it never was.
Read the rest here: The Great Recession