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The stock market benefits from relatively low energy prices - thanks to a rising US production caused by fracking - which translates into low inflation and low interest rates and gets tailwinds from the rise of Internet & other advancing technologies which reduces costs, enables new business models (Airbnb, Uber etc.) and creates new markets. The current bull markets reminds me of the similar period from 1982 till 2000 (chart below). Technically then was not a continuing bull market because in 1989 the stock market crashed overnight 23% and dropped in 1991 more than 20% during a short & mild recession - caused by the first Iraq War - but the S&P 500, the gauge for the US stock market, multiplied with the factor 13. This period benefited from low energy prices (except 1991 when the first Iran war caused a short oil price spike) and technological progress, driven by advancing software and the advent of the Internet.
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I think the positive stock market trend can continue for decades - even with some nasty but short-lived corrections. My optimism is based on following observations:
Companies 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. There is a permanent evolution process which is driving the productivity (output per worker) and the winners are getting fitter and more efficient than before. During the recessions of the years 2001/02 and 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 translates into a long term trend of rising company earnings, the engine of the stock market.
Global growth, climbing company earnings & rising stock prices are fueled by the ongoing automation process. Since the early 18th century (the first industrial revolution) the technological progress has been enabling companies to produce more & more goods & services with the same amount of employees. More and better machines (robots etc.) are doing the work of people which translates into lower costs, higher profit margins, climbing earnings & a growing global economy.
It seems that this process is accelerating 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. In the coming years software will be more & more capable to learn and develop into Artificial Intelligence (AI). The growing computerization of the economy will be accompanied by progress in engineering, robotics, nanotechnology & biotech. All these processes are further enhancing the efficiency of the companies and create new markets.
The tailwinds from the emerging markets should get stronger thanks to the ongoing catching up process in China and other emerging markets. People in Asia, Latin America & Africa have a tremendous backlog demand because income & fortune are much lower than in the Western world. But there are billions of talented & diligent people who want to reach the US and European standard. Therefore those people are working hard and they are investing to be able to expand their consumer expenditures in the decades ahead. 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, Microsoft, Google and other members of the S&P 500.
Energy prices will stay low thanks to fracking which increases the global oil supply. Technological progress will also reduce the costs for alternative energy sources, including wind and solar. New technologies, especially electric cars, trucks & buses will reduce the demand for gasoline.
The subdues costs for energy and falling prices for manufactured goods will keep inflation rates low. The Federal Reserve and other central banks don`t need to raise interest rate sharply to break inflation which often caused a recessions & bear markets in the past. Therefore the low interest rates will continue for years and inspire investments that will add to the economic growth.
I believe that these beneficial developments will strengthen each other and foster a period of prosperity and continuous gains on the stock market.
Enjoy!
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