By Robbie Citrino for Kapitall.
Over the past six months, stocks in the S&P 500 have gained 6% on average while the economy has seen little improvement. Although the unemployment rate has fallen, partially due to workers exiting the workforce at record pace, GDP has expanded below expectations and far lower than justify the recent stock price increases. This could be devastating to large cap stocks that have seen massive gains this year.
Investors are relying on cheap capital to buoy their investments, and, as long as rates are low, their money will keep flowing into the market. However, investors are prepared for an increase in rates once certain benchmarks, given by the Fed for the past few years, are met. Recently, we have seen a decrease in bond buybacks based on decreasing unemployment; however the Fed has focused on lackluster GDP expansion and low inflation.
Therefore, stocks that are propped up due to expected increases in revenues from an expanding economy could nosedive in the second half if rates rise. On this list reside some very elastic companies (meaning they fluctuate greatly based on economic conditions) including luxury car maker Tesla (TSLA), video game company Electronic Arts (EA), and American Airlines (AAL).In addition to a slow economy, investors’ move to safe treasuries and the fact that only 40% of CFOs rated the economy as ‘good’ are warning signs of an teetering financial ecosystem. All eyes will once again be on Janet Yellen today and the GDP numbers later this month to see if both an increase in tapering and a pullback in the economy will cause investors to scramble. Could inflated stocks take a hit in the coming months or will investors turn a blind eye to past economic conditions? Use the links below to start your own analysis, and tell us what you think in the comments!