U.S. stocks have been the best performing asset class in the world over the past three years with an average return of 16%, and we are currently on-track for a return above 20%. The DJIA has crossed over 22000 for the first time in history and has reached 33 closing records so far this year. There are plenty of reasons why the markets could be moving higher, but it’s extremely difficult to nail down what exactly is causing the push. Five of the most popular theories have to do with corporate earnings, monetary policy, passive investing, global outlook, and lack of other options.
The stock market’s trajectory is generally determined by the rate of earnings growth, and continuing strength from U.S. companies should push the market further. First quarter 2017 earnings were 15% higher than the previous year. As of August 11th, with 91% of the companies in the S&P 500 reporting Q2 results, 73% of the companies have reported positive EPS surprises and 69% have reported positive sales surprises. Second quarter earnings are projected to grow by double digits.
Interest rates play a large role in determining where an investor’s funds are funneled. Despite raising rates periodically, and indicating that they will do so again in the future, the Federal Reserve has chosen not to raise the Federal Funds Rate quickly. Low rates lessen incentives to invest in “safer” assets, like bonds or cash in a savings account. Without other attractive options, stocks look like the best option. The new business-friendly administration has been seen as good news for the corporate world. With talks of cutting taxes and loosening regulations, investors seem confident that companies will remain profitable in the near future. The DJIA experienced its second-fastest 20% gain following a presidential election based on the past 40 years. Hitting a 20% rise in 183 days is second only to the rise of 171 days, which occurred after George H.W. Bush was elected in 1988. These can be compared to 308 days for Bill Clinton in 1992, 537 for Barack Obama in 2008, 586 for Ronald Reagan in 1980, 1,626 for George W. Bush in 2000, and 1,630 for Jimmy Carter in 1976.
Global growth is generally projected to pick up. Despite plow horse growth in the U.S., the rest of the world seems to be heading into areas of strong growth. Both large multi-national companies and foreign-oriented funds are expected to benefit most from this steady growth and weaker dollar. Companies in the SP500 get nearly 30% of their revenue overseas, and a weaker dollar has further increased profits. The International Monetary Fund sees global growth staying steady through the end of next year. There are of course risks, Europe’s political calm could end or China’s debt bubble could burst. There’s also geopolitical risks with Russia, Iran, Syria, North Korea or China.
With such a steady track record of growth, our current market is very interesting. We are currently experiencing very low volatility. The CBOE Volatility Index recently closed at its lowest since 1993. Also, so far this year we have not experienced a decline of even 5% from the previous high. The Wall Street Journal recently reported that three major stock-market benchmarks: the U.S., Europe and Asia have avoided pullbacks this year. Never in the past 30 years have all three indexes (the S&P 500, MSCI Europe, and MSCI Asia-Pacific ex-Japan) gone a calendar year without falling at some point by at least 5%.
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