Sunday, November 20, 2016

Stock Market: This Rally Was Long Overdue

(Drivebycuriosity) - Finally, the US stock markets climbed on new all-time highs. The media suggest that the rally was triggered by Trump`s victory. Maybe so. But I believe that the rally was caused by the economic fundamentals and was long overdue.

Stock prices have been subdued since late 2014. They have been held back by falling oil prices, speculation on an alleged China crash, Europe`s worries and doubts about the US economy. But the pessimistic sentiment, which had suppressed stock prices, wasn` t justified. The recent news from the economic front show that the global economy is doing better than the pessimists are claiming: China is doing well (retail sales are growing 10% & industrial production advances 6% themoneyillusion) and the US economy is getting stronger again.

The American consumers, the engine of the economy, are doing fine. In the US the weekly US jobless claims, which signal the health of the job market, dropped to a 42 years low (bloomberg ), retail sales gained speed and wage growth is accelerating (calculatedrisk). Stocks also are getting some tailwinds from the earning season because the majority of the US companies beat the analyst´s earnings expectations easily.

The rally should continue for a while fueled by climbing consumer spending and hopes on tax cuts, reduced regulations & massive investments into infrastructure. The global economy is still getting a lot of tailwinds from cheaper commodities and relatively low interest rates (even if the Fed will hike her interest rates soon). The sharply reduced prices for oil, industrial metals and some agricultural goods 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, faster rising wages and cheaper gasoline & heating should speed up consumer spending in the US  which will foster the global economy. I also believe that the technological progress is stimulating the economy and promoting globalization. Emerging countries like China and India have easier access to new technologies which is encourafring their transformation into modern economies. These processes are working together, creating global economic growth in the decades to come.

The positive macro trends (low inflation, interest rates, better consumer spending) and the continuously rising efficiency (thanks to technological progress like Internet, other software, robotics, 3D-printing and more) will translate into higher company profits - the engine of further stock market gains.

 I am aware that Trump could spoil the rally if he acts irrational and will start a trade war with China. But there is the chance that his advisers will moderate him. Anyway the negative effects of trade barriers need time to work through the economy and won´t be felt in the coming months.


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