(Drivebycuriosity) - The US stock markets climbed to new records again. 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 & Latin America joined the party. Stock prices are
rising faster than GDPs (incomes of nations) because they areglued to the company profits. Company earnings are climbing faster
than the GDPs because corporation are gaining efficiency - thanks to
learning processes and technological progress - and are getting more
productive over time.
In the recent days the stock markets have been getting a lot headwinds from the earnings season. The majority of the SP 500 countries who have reported so far disclosed more earnings than the analysts had expected (bloomberg). So the profit growth is fueling the rally. 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
efficient over
the time - the survival of the fittest (the term was coined by Herbert
Spencer wikipedia).
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.”
Yes, there will be new corrections, crashes and sometimes recessions.
But all those events are temporary and are followed by new highs as
history shows (driveby). In October 1993 for instance, the Dow Jones stood at
3,600 points, and it past recently the 20,000 mark - even with two
sharp recessions since then.
I claim that we are in a secular bull market
that could be comparable to 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. 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).
Enjoy!
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