Monday, July 11, 2016

Stock Market: A New All Time High - What Now?

(Drivebycuriosity) - Finally, the US stock market climbed on a new all-time high. Investors had to wait 14 months for this record ( businessinsider ). Since May 2015 the stock market had been caught in a consolidation trap, held back by doubts about the US economy, speculation on a China hard landing, unease about cheaper oil and more. But all the fears were overblown.

All-time highs are normal and part of the nature of stock markets. In the long run stock prices HAVE to go up because the global economy is growing  - there is no limit. According to a study of the University of New York  the US stock market (S&P 500) created an average return of about 10% p.a since 1928! (dividends reinvested investopedia). History also shows that in the long run the stock market, represented by the S&P 500, is gaining around 7% annually on average - without counting dividends (ritholtz  ritholtz). On the average every day is in the green, though just marginally. Dips, corrections & crashes are anomalies and just aberrations from the long term upwardly trend.

I believe that the bull market for stocks will continue for years. Inflation & interest rates are still very low (even that the Fed will continue hiking her interest rates this year). Companies are reducing costs & debts, getting more efficient & productive. Last Friday we learned that the US job market is still expanding with a moderate pace and wages continue to grow. The growth of personal incomes in the US will continue to fuel a rising consumer demand which will also generate rising company profits.

The global economy is still getting a lot of tailwinds from cheap commodities. Last year`s  price collapse for oil, industrial metals and some agricultures works like a gigantic tax cut. Companies have lower costs, meaning more money to invest (including into a rising labor force), and consumers have more money in their wallets. More jobs, faster rising wages and cheap gasoline should speed up consumer spending in the US which will foster the global economy (US imports = rising European & Asian exports).

Companies also are benefitting from the technological progress - evolution of Internet and other software (including AIs), robotics, 3D-printing and more - and are getting more efficient which will translate into rising earnings. The technological progress is fostering globalization as well. Emerging countries like China and India have easier access to new technologies which is promoting their transformation into modern economies. These processes are working together, creating global economic growth in the decades to come.

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