driveby). But the main driver for the recent stock market gains is the earnings season, which had an encouraging start: A lot companies like IBM, Netflix, Alcoa, Boeing and the leading banks (JP Morgan, City, Bank of America) reported more earnings than expected.
I assume that the stream of positive surprises will continue in the coming weeks - fuel for more stock market gains. The skeptics underestimate how good leading companies are at squeezing out
climbing profits even in a sluggish economy. They are learning
organisms because they are managed by humans who are
getting better and better over time by continuously improving themselves
and their companies. This is part of the evolution process described by
Charles Darwin. As a result, companies also are getting leaner and more
the time - the survival of the fittest (the term was coined by Herbert
The 2008 recession especially forced them to squeeze out a lot of their
costs, which now leads to strong productivity gains.
Profits are also rising because the US company is getting stronger and rising household incomes (thanks to more jobs & climbing salaries) are fueling rising consumer spending. The global
economy - especially the emerging markets China, India & Co - is
also doing better which translates into increasing demand for American goods
The profit growth is also fueled by the
technological progress: Companies are using Internet, business software,
robotics, nano- & biotechnology and more technologies to reduce
costs continuously. The ongoing automatization process has been enabling
companies to produce more goods
& services with the same amount of employees. More and better
machines are doing the work of people which translates into lower costs
and higher profit margins.
If the Trump administration comes up to the expectations by reducing
taxes & regulation and investing into infrastructure the economic
growth in the US would accelerate which could give the company profits -
and stock prices - an additional boost.
I am aware that there is the risk that Trump might start a trade war with China and other countries (here my analysis
). But I have the hope that he will learn - and will be taught by his
advisers - that Americans would lose most and that this could cost him
the next election (china-trade).
I don´t fear that the Fed will spoil the expected stock market gains,
even if Yellen & Co. will hike their interest rates three times as
they had already 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.”
There are more historic date which fuel my optimism. 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 nyu.edu/ 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.