Sunday, July 23, 2017

Stock Market: Politics? What Politics?

(Drivebycuriosity) - The media are obsessed with politics. The headlines focus on President Trump, his Russian connections, his tweets and his struggles with health care reform & the political opposition. But the stock market doesn`t care. Last week the S&P 500, the gauge for the US stock market, reached a new all-time high and gained 10% year-to-date - even though the new US president didn´t accomplish much so far. The bull market, which started spring 2009, is still alive and kicking.

Obviously stock prices are ruled by economic fundamentals and not by politics. Stocks have been rising because the economic global risks are ebbing: Europe`s economy is recovering and China continues to grow with a rate of almost 7% annually, refuting all the crash callers (scottgrannis). 

The stock market gains are fueled by climbing company earnings in the US & Europe. Company earnings are rising faster than the national incomes (GDPs) because corporations are getting more efficient & more productive over time - thanks to learning processes and technological progress. 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. 

During the recession 2008 companies had restructured and reduced costs significantly in order to survive. Now they are more fit & more efficient than before. Companies are also benefiting from a new industrial revolution: Advances in Internet, artificial intelligence, 3D printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets. And they are receiving solid tailwinds from the emerging markets which are 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.

                                              Strong Earnings Season

No wonder that the current earnings season had a strong start.  Companies are reporting now the second quarter 2017: On Friday we had "Q2 results from 97 S&P 500 members that combined account for 28.1% of the index's total market capitalization. Total earnings for these companies are up +8.4% from the same period last year on +5.1% higher revenues, with 78.4% beating EPS estimates and 72.2% beating revenue estimates" (nasdaq).

I believe that the learning process will continue and will translate into a long term trend of rising company profits, the engine of the stock market rally. Investors might forget about politics.

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