Sunday, August 3, 2014

Stock Market: A King For A Day……..

(Drivebycuriosity) - It looks like the US stock market got the correction that many were praying for. Last week the US stock market (S&P 500) dropped 2.2%, bank stocks (minus 3.4%) and the transport sector (minus 3.7%)  lost even more (thereformedbroker). It seems that a handful of players took some money from the table.

Winners were the bears, notorious crash callers, short sellers and those who prefer cash and bonds to stocks. But I believe that - even if stock prices will fall deeper in the coming days - the gains of the bears will be short lived; as in the other corrections since the start of this bull market in spring 2009.

The current situation on the stock market reminds me of an old saying:"A king for a day, a fool for a life". Those who bet continuously on falling stocks may be right sometimes for a short time, but they are loosing in the long run. Since the start of the last century the  US stock market gained around 7% on average annually. Those who had reinvested the dividends reached an annually average return of around 9%.

I further assume that the bull market will continue in the coming years:

1. The current earnings season shows again that company profits are climbing faster than the analysts expect. Earnings are boosted by the advance of the global economy and by efficiency gains thanks to automation & Internet.

2. We experience a deluge of mergers & acquisitions, a sign that the CEOs are optimistic. They trust in the global economic growth and consider stocks (of many companies) still as reasonable priced or even as cheap.

3. Companies are sitting high cash piles. This leads to a flood of share buy backs and dividend hikes. Both developments make stocks more attractive.

 4. The majority, including many fund managers, is still too pessimistic, even more after the recent setback. The majority is underestimating the strength of the global economy and the health of the US companies. Many missed the rally since spring 2009 and are still sitting on huge cash reserves. Many are betting on a crash - or at least on a serious correction. For all of them the pressure is rising.

5. Interest rates are still extremely low because central bankers don´t want to risk an economical setback and inflation rates are constraint.

6. The US economy is stronger than many think and seems to accelerate as the recent purchasing manager indices show. In the second half of the year the US economy could get get some tailwinds from China which looks stronger than some months before and the healing process of Europe.

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