Are You Investing in the Stock Market? Or in Companies? The initial response to this question is usually a puzzled expression from kind people and the question: “What do you mean? Aren’t they the same thing?” The un-kind folks sometimes say something like: “That’s a dumb question, aren’t they the same thing?” The answer is NO. It is not the same.
Let’s begin with a couple of basics. Banks take deposits from individuals and businesses. Most of these deposits are known as “demand” deposits in that the customer can walk in the door at any time and “demand” their money back at any time. Other deposits are in the form of “certificates of deposit” that are supposed to stay on deposit for a fixed period of time but even these can be cashed in at any time with a penalty. Now comes the tricky part.
You may be asking: “What the heck is he talking about?” Truth is that I am talking about the stock market….shares of companies traded on stock exchanges in both the U.S. and foreign markets. “This cannot be right. The stock market is volatile. What about all the bad years like 2022 or 2008?” All good questions. And some very good answers will follow.
In the Fall of 2021 inflation suddenly exploded and the Federal Reserve began their response in a slow methodical way. As a result, the Fed Funds rate has increased from zero to 4.5% as the Fed’s deployed its go-to tool to slow the economy. In fact, many segments of our economy are showing signs of inflation beginning to slow. The sticking point right now is the jobs market. We still have more job openings in our economy than people looking for work despite the well-publicized layoffs in the tech sector. This is perceived to be a problem because high demand for workers forces employers to pay more to keep existing workers or attract more workers. This in turn puts more money in people’s pockets which they spend on products despite higher prices and the inflation cycle continues.
