Sunday, December 8, 2013

Stock Market: Why The Rally Will Continue, Taper Or Not

(Drivebycuriosity) - Last week "U.S. stocks ended their longest streak of weekly gains in a decade as data on economic growth and manufacturing stoked concern the Federal Reserve may reduce stimulus soon" (taper), writes Bloomberg (bloomberg).

I believe that this was just a short breather. I am convinced that the rally will continue, taper or not. The US economy doesn`t need the stimulus any more. The economic data show that the global economy is getting stronger. This morning we learned that China´s exports climbed 12.7% on year in November (+5.6% in October), a sign that demand from U.S. & Europe is recovering. Last week we heard that the U.S. economy created 203K new jobs in October which will fuel consumer spending in the coming months. Other economic barometers (manufacturing, personal spending) also show strength.

The stock market (the sum of all investors & traders) may be worried that interests rates will rise because the Federal Reserve could pump less money into the economy. But I believe that we will experience just a modest interest rate rise because inflation, the main cause for high interest rates, is far away.

I further believe that stock prices will continue to rise even when interest rates are getting higher.

Growth Engine Of The Stock Market

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 and ongoing efficiency gains (due to learning & technological advance).

As long as the growth engine of the stock market, the company earnings, is running with a solid speed the rally will continue.

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