Sunday, June 21, 2015
Stock Market: Thank You Janett Yellen
Last Wednesday the chairwoman of the Federal Reserve declared that the US central bank is on the track to raise interest rates this year, but subsequent increases are likely to be more gradual than anticipated earlier (bloomberg). “They’re starting from a very low point and they’re going to take it very slowly,” said one commentator.
That´s good news for the stock market. Historically most bull markets ended (when stocks dropped at least 20% from a previous peak) when the Fed tried to cool down the economy and brake inflation by sharply lifting interest rates, which causes a recession. Today there are no signs of an overheating economy and inflation ist still subdued, therefore the interest rates hikes will be moderate in foreseeable future. If the bull market will end in the coming months, the Fed won´be the party pooper.
The question is: What else could end the bull market? History also shows that a sharp rise of oil and other commodity prices causes a recession and iniates a bear market (stocks fall more than 20%). This happened in the 1970s as OPEC hiked oil prices sharply to punish the West for Israel`s Yom Kippur War. In 2008 again a sharp spike of the oil prices (to $146) worsened the recession at least. But oil and other commodity prices are tame, thanks to a rising production fostered by technological progress (for instance fracking driveby).
There are also no signs of overinvestment into capital endowment (in the late 1990s companies invested tons of money into new hardware & software to avoid the predicted year-2000-problem, meaning the claim, that computers stop working when their clocks change to 01.01.2000, which didn´t happen, so the massvie overinvestments caused enormous overcapacities and lead to a recession & crashing stockmarkets) and there is no housing bubble so far.
Therefore chances are high that the bull market continues to 2016 at least. Enjoy.