Tuesday, August 21, 2018

Stock Market: Welcome To The All-Time High

(Drivebycuriosity) - Finally, today the US stock market, represented by the S&P 500, climbed to a new all-time high. I think that all-time highs are normal and part of the nature of stock markets. In the long run stock prices HAVE to go up - there is no limit.

Since its inauguration in the year 1896 the Dow Jones, a gauge for the US stock market, has been rising annually at least 7% on average - in spite of all the recessions and crashes that investors have suffered in this period. Considering the interest compound effect an annual 7% gain means that stock prices double every 10 years or so (calculator).

In the long run stock prices are just reflecting the rise of the global wealth that has started in Europe & US during the industrial revolution in the late 18th and early 19th century. In the recent decades Asia, especially China,  joined the party. Stock prices are rising faster than GDPs (incomes of nations) because they are glued to the company profits. Company earnings are climbing faster than the GDPs because corporation are getting more efficient - thanks to learning processes and technological progress - and are getting more productive over time.

 In the recent months stocks had been hold back by rising interest rates, climbing oil prices (which fueled inflation) and Trump`s trade war. But these negative impulses are now priced into stock valuations. For a while Wall Street had neglected the strong company earnings and ignored that US Companies had a stellar earnings season. In the second quarter of 2018 earnings for the big US companies, which are represented in the SP 500, grew about 24% from the same period last year  (zacks). Stocks rose less than earnings (plus 17%) so they have been getting  a bit cheaper   (falling P/E ratios).

Just a part of the earnings growth is the result of the recent tax cuts of the Trump administration, about 7 percentage points estimates LPL research. Even without tax cuts earnings grew about 17% (basic earnings growth rate). Company earnings are fueled by the global economy which is growing about 4%. But the earnings growth is also a long term trend. Corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. They are learning organisms because they are managed by humans who are 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.

Company earnings are also boosted by automation.  Since the early 18th century (the first industrial revolution) the technological 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, higher profit margins and climbing earnings.

It seems that this process is accelerating again and we are at the begin of new industrial revolution. We are experiencing a rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are also beginning to use 3D-printers to become more cost efficient and flexible-

Enjoy!



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