When the problems around the debt ceiling are solved, the S&P 500 will be back at the $1700 level and only a few percent below the all-time high of $1729. Ever heard of Acrophobia? It's the Greek name for fear of heights. It is a common disease a lot of investors suffer from, but here are a couple of reasons why this could be just the beginning of a multi-year rally for the international stock markets.
1 Low interest for years to come
The European Central Bank, the Bank of Japan and the Federal Reserve have all cut their interest rates to near-historic lows. They have also injected trillions of dollars into the financial markets.
This money has driven down the yields on government debt, making other assets such as stocks, real estate and commodities more attractive. We're awaiting a period of higher economic growth, but until then, central banks keep interest rates low. The earnings yield on stocks becomes more and more attractive in this environment.
2 Companies are doing well
Take a look at the 200 largest companies worldwide. The majority is very healthy and profitable. The cost cutting, focusing on core products and presence in the emerging markets have served them well. Growing turnover in the emerging markets made up for the loss of sales in the Western world.
3 World economy is growing, albeit slow
Although the Western economies are still vulnerable, the growth in countries like Russia, China and Indonesia is enough to keep the world economy expanding. Actually, too much growth will endanger the low rates policy of the central banks and therefore the current situation is very accommodative for stocks.
4 World population keeps growing
The world population hasn't stopped growing during the years of the financial crisis. In the emerging countries the middle-class is expanding quickly: they have more money to spend and there's new demand for luxury products. Companies will profit from this steady increase of consumers.
5 Flight from other asset classes
During the financial crisis many investors hid their money in treasuries, gold or savings accounts. Right now we see that with every stock market correction investors take the opportunity to get rid of their 'safe haven' investments, where yields are close to zero, to jump into assets with a higher yield, like stocks. Again, looking at the top-200 companies, a dividend yield of 3% is quite realistic. In a normal situation, healthy companies have a 5 to 10% return on equity which means there's more to it than just dividend.
It is often said: don't fight the Fed. Central banks are poised to keep interest rates low for the coming 3 to 5 years, maybe even longer. On the one hand the yields in 'safe havens' will stay very low, while on the other hand companies will profit from the above mentioned circumstances. Don't bet on a single stock, instead invest your money in trackers who follow the leaders in every sector.
Stocks are the place to be for the coming years.