Stock Market: Happy Easter 2018

(Drivebycuriosity) - It`s Easter again. Many countries in the Western world celebrate Easter in some way or another. In Germany for example most people have 4 days off, including Good Friday (called "Karfreitag", a Catholic term) and Easter Monday. Even Wall Street was closed on Good Friday.

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").

Since Easter 2017 the US stock market, represented by the S&P 500, gained about 12%  but she took a breather in the recent months. The S&P 500 gave up 1.2% in the first quarter of 2018 thanks to several headwinds. President Trump announced massive tariffs against China imports, which could lead to a trade war, and the Federal Reserve hiked her interest rate again and signaled at least three more hikes for this year. The sentiment for technology stocks suffered from a data scandal at Facebook and an accident brought the self-driving car sector (including Tesla, Uber and the chip maker Nvidia) under scrutiny. 

But I am convinced that the rally will continue. 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 also doubt that Trump`s tariff hikes will escalate into a full fledged trade war - which could cause a new recession. I think that all participants (USA, Europe, China) are aware of the risks and I suppose that the counterparts will have enough brain to negotiate for an acceptable compromise.

I suppose that stock market will still benefit from four trends at least:

1. Company profits will continue their solid growth, the engine of the stock market gains. 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. Lower taxes and less regulation in the US will also support the growth of the company earnings.

4. We 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).

Happy Easter!