In the recent days we are experiencing another correction - one of so many (charts above). The stock market is still climbing a wall of worry, the newest worry is caused by the coronavirus fear of course. Apparently the price war on the oil market, which the Saudis started on Saturday, is intensifying the sell-off. As a result the bull market is getting tested again as it did @ Christmas time 2018. I don´t know where panic & hysteria will drive stock prices in the coming hours & days. But the recession fears, which might fuel the recent losses and short selling, are unfounded. The coronavirus won`t push the US into a recession because sharply falling oil prices & interest rates compensate most of the perilous coronavirus impulse on US Economy.
Dropping costs for gasoline & natural gas work like a giant tax cut. The price war on the oil market is a gift for the global economy. Imploding oil prices are a huge stimulus program because consumers have more money to spend and corporations have less costs. Therefore consumer spending, which is about 70% of the US GDP, should stay robust. Spending for renting should be immune to the virus, spending for health care might even rise. People might travel less, might go out less and visit fewer shops & restaurants, but they may shop more online and many might work from home. It is possible that the virus - and measures against it like quarantines - alter the behavior. We learned from China that there more people are working, learning & shopping from home which is fostering digitization and so rising efficiency & productivity of the economy ( driveby ). I believe that the negative coronavirus impact on real income, employment, industrial production and retail sales will be constrained and short lived - shorter than a quarter - and will be be followed by a v-shaped recovery. The numbers from China where the new cases dropped sharply are encouraging. There won`t be a recession.
I am convinced that the bull market will see more anniversaries. Since 1928 the US stock market (S&P 500) created an average return of about 10% p.a! (dividends reinvested nyu.edu/ investopedia). This includes the great depression and the following recessions, crashes, virus epidemics and other unfortunate events. So, stock market gains are the rule and dropping stock prices (including corrections & crashes) are the exception and temporary.
I claim that we are in a secular bull market that could even dwarf the stock market rally from 1982 till 2000 when the Dow Jones jumped from just 800 points to around 10,000 points (even though the period included the crash from 1998 and a short recession in 1991). My claim is mainly based on four 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. Lower taxes and less regulation in the US will also support the growth of the company earnings.
4. The catching-up process in China will continue, followed by India, Indonesia and a lot of other countries. Their climb 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, Boeing and other members of the S&P 500 (world).
To be continued
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