When a bull market begins, near the end of a recession in business activity, the fed is actively pumping money into the banking system. This new money seeks a place to go where it can work the hardest. During the early stages of the economic recovery the real economy is running below its capacity to produce. There is slack in the system. It can take years for business activity to rise to a level where companies start to invest in new productive capacity. Generally, the first half of a bull market move in stocks is very robust because new capital is not needed by Main Street and thus finds its way to Wall Street where speculation is very profitable.
There is always competition for capital. So capital is continuously migrating to where it is perceived to be working most efficiently and profitably. We can think in terms of two big camps which are competing for capital in the domestic economy; Main Street and Wall Street. When the economy is slow and running below its capacity to produce, Main Street has no incentive to invest in new plant, equipment or to hire additional employees. The Fed pumps money into the banking system and it goes toward Wall Street speculation. During this time Wall Street is paved with gold and Main Street is full of pot holes. When the Animal Spirits of speculation are at work on Wall Street it is a very exciting time. Eventually that capital starts moving to Main Street (as the economy improves) when value and opportunity emerge.
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