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Economy will catch up with stock market

Traders work floor New York Stock Exchange Monday as Dow gained nearly 500 points. The Dow Jones Wilshire 5000 index

Traders work the floor of the New York Stock Exchange on Monday as the Dow gained nearly 500 points. The Dow Jones Wilshire 5000 index is up almost 22 percent since March 9.

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Updated: May 3, 2013 12:14PM

The most basic rule in investing is: Don't Fight the Fed! When you combine the determination of the Federal Reserve to create new money with the political imperative to stimulate the economy at all costs, it's never a surprise to see stock prices soar.

Three weeks ago there was hand-wringing over the possibility of $1.8 trillion dollars in budget deficits to get the party going. It is no coincidence that since March 9, the value of the entire stock market -- as measured by the Dow Jones Wilshire 5000 index -- has gained $1.8 trillion!

Money fuels stock markets. Yes, it is also intended to fuel the mortgage market, and car purchases, and retail sales. But just as water running downhill seeps through the easiest crevasse, the first place to feel the effect of money creation is the stock market. Later, the real economy will catch up.

The DJ Wilshire 5000 is up nearly 22 percent from its March 9 low. Can you expect home sales or auto sales to rise a similar percentage from those gloomy days when this column pleaded for optimism? That remains to be seen, but it looks like we're off to a good start. Sales of existing homes edged up to a surprising 4.72 million in February.

Now what?

Now what are you going to do about this stock market rally? Remember when you said you'd sell out if only you could "get even?" Well, you're getting closer to even with every "up" day in the markets. There's nothing like a good rally to make you lose perspective.

Who bought the bottom? If you continued to invest in your 40l(k) plan or IRA, there's a good chance that a few of your dollars came in very close to the bottom. And surely the newsletter writers will claim their market-timing prowess. Maybe the actual bottom occurred two weeks ago, when the media ganged up on Jim Cramer -- the one guy with enough guts to tell people to raise cash last fall -- 5,000 Dow points above the lows.

You'll find many smart commentators who think this is only a rally in a bear market. After all, we have huge economic problems -- and millions are still losing jobs and homes. The pain isn't over for the real economy.

Have you figured it out yet? No one can call tops and bottoms with regularity. But if you keep investing according to your plan -- and diversify appropriately -- you'll be positioned to be part of the long uptrend of the American economy.

When it comes to creating money, not even the Fed's "printing presses" can rival the stock market for creating wealth. And that's The Savage Truth.

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