Monday, February 8, 2016

Stock Market: A Defense Of The Bull Market

(Drivebycuriosity) - The bull market for stocks, that started in spring 2009, is under attack. The S&P 500, the gauge for the US stock market, dropped about 13% from its peak last year. If the barometer would fall 20% or more a new bear market would start by definition.

I believe that the recent selling panic is ill founded. The massive losses, especially for bank & Internet stocks, are caused by herding behavior. Hedge funds and other speculators typically buy and sell the same stocks, at the same time, and track each other's investment strategies. In the recent days traders - including the timid managers of huge funds and other portfolios - have been dumping anything which seemed risky, their sales caused others to sell too, which lead to a snowball effect of more and more selling. The result are the downward spiraling stock prices we are seeing now.

If we believe the media the selling is inspired by fears that the cooling Chinese economy and falling oil prices will cause a new global recession (bloomberg  businessinsider). These fears are overblown. China is managing its soft landing - economic growth rate between 6-7% - thanks to a rising service sector and climbing retail sales (plus 11% annually).

The oil price collapse is a boost for the global economy. Consumers worldwide have more money to spend & companies are benefitting from lower energy, material & transportation costs.  The year 1986 had a similar oil crash that lead to an epoch of cheap energy and a prosperous economy (driveby). The majority of the US bank beat the analyst`s profit expectations for Q4 2015.  They managed the impacts of the steep drop in prices for oil and other commodities on their loan portfolios better than feared, helped by a solid consumer business and JP Morgan reported that its fourth-quarter profits rose 9 percent from a year earlier, helped by a strong performance in its consumer banking division and lower legal expenses (here my post about the US earnings driveby).

The bull market is still founded by the economic fundamentals - bear attack or not.

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