Over the last several years, there has been a growing discrepancy between America's booming stock market and its sluggish macroeconomic growth. Even as GDP inches upward and the unemployment rate "declines" — due to a substantial drop in labor participation — the bull market has charged forward. With the exception of occasional corrections, stocks as a whole have performed phenomenally since 2009 (the Dow has more than doubled since the 2008 recession). This has resulted in growing concerns over rising economic inequality, which is mainly fueled by the actions of the Federal Reserve.
Following the economic turmoil that followed the collapse of Lehman Brothers, Bear Sterns, and other financial institutions, the Federal Reserve, in an effort to stimulate the economy, implemented a program known as “quantitative easing” (QE). The Fed declared that it would purchase $100s of billions in government securities, primarily from commercial banks, in order to increase the amount of available cash in the banking system. The hope was that banks would then lend this extra cash to consumers and, therefore, invigorate the economy.
However, many banks, having lost billions during the housing and financial crises, often for lending money to individuals with low credit scores, have since operated very cautiously; commercial banks now only lend to the “safest” borrowers — other banks, fund managers, stable companies, and other Wall Street insiders. Riskier borrowers, such as people without perfect credit, small businesses, and first-time homebuyers, have not exactly benefited from the Fed's cash infusion. As a result, the Fed’s “easy money” has helped fuel a bull market, rather than stimulate the general economy.
The combination of big stock drops, during the height of the 2008 financial crisis, and tight household budgets have forced middle class citizens out of the stock market. Thus, many middle class households have also missed the benefits of QE; even if they were not direct beneficiaries of the program, most people with invested monies would have observed substantial increases in their portfolio value. As a result, this reality has driven recently perceived economic inequality growth: many in the bottom half of the income spectrum have been either unable or unwilling to invest in the stock market and benefit from the artificial boom.
After more than five years of QE, there is frequent speculation that the Fed will halt, or at least scale back, the program (which would end "easy money" investments). Hence the apparent paradox of why markets will sometimes react negatively to good economic indicators — investors worry that a strong economy will signal an end to QE. But so far, the new Fed Chair, Janet Yellen, has made no indication that she will end the program.
It's not too late to take advantage of this bull market. Many professional investors and analysts believe market momentum will continue. However, it is hugely important to understand the role of the Fed, and to be wary of how its actions manipulate investor sentiment.