Saturday, April 15, 2017
Stock Market: Happy Easter 2017
Easter also stands for the begin of spring. The German literature has a lot of Easter poems which are referring to the seasonal issue. The most popular German Easter riddle is "Der Osterspaziergang" (the Easter walk osterspaziergang) by Johann Wolfgang von Goethe. It starts with the line "Vom Eise befreit sind Strom und Bäche" ("freed from the ice are rivers and creeks").
In the recent days the US stock market (SP 500) gave up some gains but has still a plus of 4% year-to-date. It looks like many clueless fund managers were selling, using the geopolitical noise (Syria, Afghanistan, North Korea) as pretense. They have been doing this for years, selling any time when the sentiment got clouded. No wonder that managed funds have been under-performing the stock market for years. Even Joe Sixpack could easily beat the majority of the fund managers by buying an ETF on SP 500.
I reckon that the current correction phase will be moderate and soon be over like all the dips since 2009. I have written similar posts before (2016 2015 2014 2012) and I am quite confident again.
The earnings season for Q1 2017 had an encouraging start. Leading banks (JP Morgan, Citigroup, Wells Fargo) reported higher earnings & revenues than expected. I think the positive earnings surprises will continue in the coming days and could start a new stock market rally. Then the pessimists, who are betting against the stock market, will get performance pressure again and have to come back and their purchases will strengthen the rally.
Last week one very important headline was overhead amidst all the geopolitical noise: Reuters wrote "Trump backs away from labeling China a currency manipulator" (reuters). That reduces the risk of a trade war with China considerably. And China is trying to calm the waves in the North Korea conflict (cnbc). It seems last week`s Trump Xi meeting was fruitful.
I also believe that the pessimists have a too short time horizon. Since 1928 (the long run) the US stock market (S&P 500) created an average return of about 10% p.a! (dividends reinvested nyu.edu/ investopedia). So, stock market gains are the rule and dropping stock prices (including corrections & crashes) are the exception.
I claim that we are in a secular bull market that could even dwarf the stock market rally from 1982 till 2000 when the Dow Jones jumped from just 800 points to around 10,000 points. My claim is mainly based on three arguments:
1. Company profits will continue their solid growth. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and will translate into a long term trend of rising company profits.
2. We are experiencing a new industrial revolution. Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets.
3. If president Trump comes up to his promises and will reduce regulation & taxes and invests into the US infrastructure company profits will even climb faster.
4. We also are having solid tailwinds from the emerging markets which are even getting stronger. The catching-up process in China, India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies like Starbucks, IBM, Caterpillar, Apple and other members of the S&P 500 (world).
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.”