Supply and Demand in Your 401(k)

Supply and Demand makes stock prices move.

Unless the U.S. stock markets go straight up for the last two weeks of December, the investment year of 2011 is going to end up as unprofitable for most individual company 401(k) retirement plan participants.

At the current stage of this stock market correction, every stock market investor who is motivated to sell their stocks has already sold. The only people left holding on to U.S. stocks now are not going to sell at these current low price levels.

If a U.S. stock market investor has not sold their stocks to date, there is a good chance that they would not be motivated to sell their stocks and lower prices sometime in the future either.

Eventually, new buyers for U.S. stocks will emerge. When new demand comes in, it will not make any difference what the world economic news is focused on.  The financial news headlines about Europe, banks, the Fed, inflation, unemployment or another economic recession will quickly fade away.

When the demand for U.S. stocks overtakes supply, stock prices will go back up. At that time, every Minnesota 401(k) company retirement plan participant you know will finally “make money” in their company retirement plan account.

As we close out the last few days of 2011, there has been more supply (sellers of stocks) than demand (buyers of stocks) over the last several weeks of this year. The financial journalism experts have blamed the recent stock market decline on several of the factors listed above.

As much as the so called financial experts want to lead you to believe that the stock market is a super sophisticated universe with its own rules and hidden economic forces, it really is not. The prices of U.S. stocks follow the basic law of supply and demand. 

There are numerous examples of the battle between supply and demand all around us in everyday life. 

When the supply of homes for sale increased at the same time that the demand for homes decreased, the result was lower home prices. Minnesota real estate prices are still struggling to work through an excess of homes for sale now. 

When the demand from companies hiring new employees dried up, the supply of workers looking for a new job (unemployment rate) rose. Fewer jobs offered (supply) means more people looking for jobs (demand).

When Minnesota businesses stopped borrowing money to expand (demand for money) because of the slowing U.S. economy, interest rates (supply of money) dropped to historic lows.

In each one of these examples, a drastic change in the supply-demand relationship caused an equally drastic change in the price of the corresponding good or service.

The stock market goes down for only one reason; there are more sellers than buyers of stocks.  The stock market goes up for only the opposite reason; there are more buyers than sellers of stocks.

Stock market prices follow the same economic forces as every other commodity, good or service in the world.  The price of everything is controlled by supply and demand. 

Learn how to apply the basic law of supply and demand in order to improve your investment management decisions in your company 401(k) retirement plan account.

Ric Lager
Lager & Company, Inc.

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