(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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