Sunday, June 9, 2013

Stock Market 2013: Why The Party Will Go On

(Drivebycuriosity) - Last week the U.S. market (S&P 500) gained 0.8% and finished with the biggest two-day rally since January (bloomberg). The robust stock market must disappoint those drama queens who are lamenting about "the correction" (thereformedbroker). Of course, more corrections will come, they are part of any rally. But I reckon those corrections will be short lived and mild as the corrections we had since summer 2012.

I assume that the stock market party will go on for many months to come. The current economy situation in the U.S. is perfect for rising stocks. Last week we got news that weekly jobless claims continued their slow downwards trend, we also learned that 175.000 new jobs  were created in May and that the service economy, which has the lion`s share (around 70%), grew a bit faster.

The economic growth is strong enough to fuel continuous rising consumer spending and further climbing company profits, but not strong enough to ignite a sharp rise in interest rates and commodity prices. Cheap commodities and credits will fuel more investments, climbing company profits and stock market gains.

And there is more. The economic news from Europe, including better manufacturing indicators (Manufacturing PMI), are encouraging and signal that the recession there comes to an end.

And companies have huge cash piles to finance further stock buy backs and dividend hikes. Both trends are making stocks more attractive.

The stock market also is benefitting from some tailwinds:

1. We are experiencing a new technological revolution, meaning rapid innovations in computing (including mobile devices like iPads & iPhones), engineering, robotics, nanotechnology and other fields. This progress translates into big company profits because it enhances the efficiency of the companies and creates new markets.

2. China reported today that retail sales grew 12.9% in May from a year earlier,  and industrial production advanced 9.2%. The shows that the second-largest economy is still on a growth path and will play an important role as an  engine for the global economy.

The majority missed the rally so far and is sitting still on high piles of cash and bonds. I believe many will come back and add to the gains on the stock market.

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