Saturday, December 24, 2016

Stock Markets: Merry Christmas

(Drivebycuriosity) - Christmas is the season for reflection but also for giving gifts. "The best aspect of Christmas is the aspect usually decried by the mystics: the fact that Christmas has been commercialized. The gift-buying . . . stimulates an enormous outpouring of ingenuity in the creation of products devoted to a single purpose: to give men pleasure. And the street decorations put up by department stores and other institutions—the Christmas trees, the winking lights, the glittering colors—provide the city with a spectacular display, which only “commercial greed” could afford to give us. One would have to be terribly depressed to resist the wonderful gaiety of that spectacle". From the Ayn Rand Lexicon (aynrand).

Investors received this year ample presents. Yesterday the U.S. stock market closed close to an all-time high. The S&P 500, a gauge for the U.S stock market, gained 12.8% since last Christmas (10.8% year-to-date) and the Dow Jones almost touched the mark of 20,000 the first time of his history. The British stock index FTSE 100 climbed 13.2% year-to-date (Brexit!) and Germany`s DAX advanced 6.6%.

The rally is a response to a global economy which is getting stronger (driveby). The stock market also signals growing optimism for the year 2017. I think the rally will continue next year - even if the Fed  will hike her interest rates three times as projected. History shows that stock prices & interest rates can happily rise together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”

I think we can have a similar development next year. Companies will benefit from a growing global economy and will sell more products which will translate into higher profits.  Helpful are the ongoing efficiency gains (due to learning & technological advance) and the growth of the emerging markets (China, India & Co). Therefore the profit gains will overcompensate the negative effect of the rising interest rates and the stock market rally will continue.

Merry Christmas to everyone!

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