By Big Al
Serious Food for Thought for folks like me from Valentin Schmid, Business Editor of The Epoch Times.
Why Stocks Keep On Rallying
Stocks have been going up since 2009. What’s driving this, and how long can the bulls keep on running?
By Valentin Schmid, Epoch Times |June 14, 2017 AT 11:48 AM
June 15, 2017 3:30 pm
Traders on the floor of the New York Stock Exchange on April 7. (DREW ANGERER/GETTY IMAGES)
In normal conditions, stock market functions are a barometer for the economy. Good earnings and economic activity drive stocks higher. Valuations are another factor: Are stocks cheap in terms of their earnings, and are they paying a high dividend yield?
This stock market is different: Earnings have been falling, until the most recent earnings season; the economy has been lukewarm, though not terrible; and different valuation metrics are at the previous bubble peaks of 1929 and 1999. Currently, the S&P 500 pays less in dividends (1.9 percent) than the 10-year Treasury note does in interest (2.2 percent).
All these fundamentals have been begging for a bear market in stocks for several years now, but it has never come. In fact, the S&P 500 just made a new record high of 2,445 on June 9 and is up 8.62 percent for the year and 84 percent over the last five years—not a shabby performance. Not even political gridlock, the risk of war, and Federal Reserve (Fed) interest rate hikes can shake the market this year.
So why aren’t stocks correcting? It turns out there are a few good reasons as to why stocks have rallied for so long.
Central Bank Support
By far the biggest reason for the prolonged rally, in spite of lukewarm GDP growth and sky-high valuations, is continuing money-printing by not just the Fed but by all global central banks.
Federal Reserve Board Chairwoman Janet Yellen holds a news conference following a meeting of the Federal Open Market Committee in Washington on March 15, 2017.(Chip Somodevilla/Getty Images)
Although most central banks do not buy stocks directly, they buy bonds, which in turn affects the stock market.
“The stock market is very expensive but doesn’t go down, because the bond market is even more expensive. Valuations are very high because bond yields are low. That’s the effect of central banks printing $200 billion per month in a period where there is no crisis,” said economist and author Daniel LaCalle.
According to research by Bank of America, global central banks have bought $1.5 trillion in assets in 2017 alone. Although the Fed has stopped asset purchases and even raised interest rates, the Bank of Japan and the European Central Bank have picked up the slack.
When central banks create electronic reserves to buy mostly sovereign bonds, it takes risk out of the market, and people have to go elsewhere.
“When you take a lot of assets out of the market, …read more
Source:: The Korelin Economics Report