Saturday, September 3, 2016

Stock Market: Optimism Pays

(Drivebycuriosity) - Last week the US stock market closed near new the all-time high. The S&P 500, the gauge of the US stock market, gained 6.7% year-to-date so far and 9.1% in the recent 12 months. These gains exclude the dividends which add annually about 2% on average.

These numbers show that optimism pays. People, who had sold stocks in the panic of February, missed a rally of about 20%. The recent gains are no exceptions. 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.

Pessimists, who shun stocks because the market could crash, are wasting money. Stock market crashes are seldom and they are less destructive as the scaremongers want you believe. Since 1896, when the Dow Jones ways founded, there were just 4 events with a daily loss of more than 10% (wikipedia). 4 massive crashes in 119 years - that gives them a very low probability! And 3 of them happened before Word War II. Dips, corrections & crashes are anomalies and just aberrations from the long term upwardly trend.

I believe that the bull market 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 and are getting more efficient & productive. They also are benefiting 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.

The global economy is still getting a lot of tailwinds from cheap commodities. Last year`s  price collapses for oil, industrial metals and some farm products work 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, rising wages and cheap gasoline foster consumer spending in the US and are so supporting the global economy (US imports = rising European & Asian exports).

These processes are working together, creating global economic growth & stock market gains in the decades to come.


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