Thursday, December 5, 2013

Stock Market: Taper? So What?

(Drivebycuriosity) - This morning we got news that the US economy does much better than many think. US Economic growth (GDP) in Q3 2013 was revised to 3.6% and the weekly jobless dropped to 298K last week (calculatedrisk). Yesterday ADP, a private company, reported that the US private sector created 216K new jobs in November.

The stock market responded negatively and swung into the red because the strong numbers raise the possibility of the taper, meaning the gradually reduction of the Federal Reserve Bank`s stimulus program QE3 (massive purchase of government bonds). The economy doesn`t need massive stimulus measures anymore. The market seems to expect that interest rates will rise. I agree, but I don´t think that stock prices have to fall.

Stock prices (value of the company) depend on expected company profits discounted with the interest rate. Higher interest rates imply a bigger discount. Everything equal this translates into a lesser value of the stock.

But we live in a world where nothing stays equal. A stronger economic growth also implies that company profits will be higher and will rise faster. I think that company earnings will accelerate their growth next year thanks to the stronger economy. I also expect just a moderate rise of interest rates because we are far away from any inflation and the risk  of an overheating economy.

Therefore I expect that the stock market rally will continue because the positive impulse of rising company profits should overcompensate the (weak) negative impulse of (moderate) rising interest rates.

No comments:

Post a Comment