Stock Markets Continue to Explode Higher — But Can It Last?
On October 17, the Dow Jones topped 23,000 in midday trading, setting another record a mere six weeks after reaching 22,000. Since Donald Trump won the presidential election in November 2016, the Dow Jones has climbed 26 percent, due in part to Trump’s plans for deregulation, corporate tax reductions and spending on infrastructure. There is no doubt that the country is experiencing a bull market, but the question on everyone’s mind is whether the stock market will be able to keep up its explosive climb.
Why the Stock Market Could Continue to Climb to Record Heights
According to an article posted at USNews.com, this is the 11th bull market since 1926. On average, each bull market lasted for 54 months and had a total gain of 154 percent. As of March 2017, the current bull market had lasted 95 months and had a gain of approximately 231 percent. From the historical perspective, the current bull market is old, leading some investors to speculate that the cycle must surely be nearing an end. However, there are many factors other than the cycle’s age that indicate that the explosive growth could continue.
• Interest Rates: Even after the Federal Reserve raised interest rates twice in 2017 — and will likely raise them one more time before the end of the year — the rates are still extremely low. Low interest rates translate into lower payments on consumer debt, giving people more spendable income for discretionary purposes. In turn, more money is returned to the economy, which helps businesses grow.
• Corporate Earnings: Strong corporate earning drive long-term equity returns. Earnings have been strong; earnings exceeded 7 percent for the fourth quarter of 2016 over the same period in 2015, and third-quarter earnings exceeded 4 percent.
• Inflation: The inflation rate is extremely low, which affects the price-to-earnings ratio. When inflation is high, corporations must often discount their future earnings, resulting in lower stock prices. Furthermore, high inflation rates tend to stress consumers, which can trigger a recession that can cause stock prices to tumble. Currently, economists see no evidence that a recession is in sight.
• Positive Historical Barometers: What the market does during January and February of each year has historically indicated how the market would perform for the rest of the year. The S&P 500 was higher for the first two months of 2017, and since 1950, this has happened 26 times. In all 26 cases, the S&P 500 provided a higher total return for the entire year. When it was higher in January only, the next 11 months were higher in 88 percent of the instances.
• Housing: In December 2016, national home prices were the highest they had been in 2.5 years. The fear that interest rates could increase have led many consumers to feel a sense of urgency to buy or refinance sooner rather than later.
Although it is true that the market dipped slightly when Trump was elected, according to The New York Times, by the end of the following day, the major market indicators were up by more than 1 percent. Most of the uncertainty was triggered by Trump’s campaign speeches that stressed his desire to raise tariffs on Mexico and China, withdraw from some trade agreements and negotiate better terms for certain other trade agreements. However, his views on increasing government spending for infrastructure and deregulating certain industries drove selected stocks significantly higher and helped fuel the rally.
Could the Bull Market Be Derailed?
At the moment, the bull market appears to be on solid footing, and most economists do not see an obvious reason that it will not continue to grow for at least the next two or three years. Naturally, stock prices will likely fluctuate from time to time, but the long-term prospects seem excellent. As Warren Buffett stated in an interview reported by MarketWatch.com, when viewed in terms of one, two and three decades, the stock market will no doubt be higher. What he means is that the market tends to correct itself periodically, but given sufficient time, it will always go up.
That said, there are things that could put an end to the current bull market.
• China’s economy is showing signs of distress, and according to Bloomberg.com, the U.S. could be in trouble if China experiences an economic collapse. The demand for American goods could disappear. Some European banks could fail. China has already been selling off U.S. bonds and would likely be forced to sell off many more. None of these three effects can do much harm alone, but all of them together could weaken American banks and cause some investors to lose money, possibly triggering a recession that would derail the bull market.
• The Federal Reserve has announced that it plans three rate hikes in 2018 and two in 2019. If the Fed raises rates too much or too quickly, consumers will have less money to contribute to the economy, leading to stagnant growth.
• The jury is still out on how wage pressure and health care issues will impact businesses. If businesses see significant drops in their profit margin, they could resort to outsourcing work overseas where labor rates are cheaper, or they could choose to replace humans with more automation or robots. All of these scenarios could see unemployment rates rise.
• Investor euphoria can cause bubbles to form; the dot-com bubble of the 1990s is still cited as a classic example of investor euphoria. Everyone wanted to get in on the tech boom, resulting in prices that were bid up to unsustainable levels. However, surveys have shown that there is currently a lack of investor euphoria, so unless investors change their attitudes dramatically, there is little risk of a bubble forming — and bursting. Conversely, if investors become so frightened that they begin to sell off their stocks, prices could plummet.
• So far in 2017, California has been ravaged by wildfires and Texas, Florida and Puerto Rico have suffered massive property damage from hurricanes. Many homes were damaged or totally destroyed by flood waters, especially in Texas, and millions of cars were also destroyed or severely damaged. Unfortunately, not all homeowners had insurance that would cover floods. The fear is that a significant number of people will simply walk away from their mortgages, which could have a negative impact on a housing market that is still in recovery.
More than likely, the bull market could weather one of the above scenarios and possibly two of them. If three or more occur, however, the market could potentially be derailed — temporarily. Over the long term, it has always rebounded, and it will probably continue to do so.
The investors reaping the greatest benefits from the stock market tend to educate themselves on the market before turning loose of their money. If you would like to learn more about the stock market or other financial topics, you can find many informative articles at the Personal Money Store.