- Although people might feel a little discomforted with the heights of the stock market, I see no reason for a pullback anymore.
- There is no reasonable alternative that provides sufficient returns to beat inflation.
- Central banks are stimulating and keeping interest rates low.
- There are solid business profits, although economic growth is still meager.
This market will not go down any more
To everybody who wants to short this market, has a fear of heights or otherwise feels the financial markets are way too high at this level, I have news for you: This market isn't going down any more. Not now and not later.
Let me tell you why not.
The market, or let's say, stocks, form a certain kind of retirement trust for when you're old. Not for everyone though, there are some people day-trading, others have written brilliant computer programs that arbitrage the differences between correlating stocks, but most of it is owned by those who are in it for the longer term.
Investors worldwide want to provide themselves with a solid income when they are retiring and protect themselves against inflation. The financial crisis has taught us that it is wise to take good care of your savings, that your money is not safe everywhere and that the yield on an ordinary savings account doesn't make you too happy either.
Looking at it this way, an investment in a multinational company that raises its dividend year after year is not such a bad choice. Quality shares, or dividend aristocrats as you Americans call it, offer investors an annual dividend of 2% to 3 % on average. The stock may go down every now and then, but when this company is profitable year after year, at some point, investors will notice and the stock will be picked up again.
The stock market currently rests on three pillars:
• The solid business profits, although economic growth is still meager;
• Central banks stimulating and keeping interest rates low;
• No reasonable alternative that provides sufficient returns to beat inflation.
Looking at the above, it becomes immediately clear that any downside in the economy will always be countered by more stimulus and lower interest rates. The well-known Bernanke-put has already been adopted by a range of other central banks, like the Japanese and European central banks. The Chinese will go even further; they'll probably start printing money when the growth rate falls back to 7% or lower. So disappointing growth means more stimulus, a further search for yield and therefore certainly not lower stock prices.
Risk of higher interest rates
The danger for the stock market comes from the other side. Good economic data means reduction of stimulus and rising interest rates. A higher interest rate means more alternatives for long-term investors. At the same time higher rates means also higher financing costs for businesses.
The corporates themselves are already pretty addicted to cheap money. Look at Apple (NASDAQ:AAPL), which sold $17 billion in bonds just to buy back its own stocks. The $130 billion in cash that is stalled outside the U.S. cannot be used because it first has to pass through U.S. taxes (35%). But that's another discussion.
A substantially higher interest rate, in my opinion, is the only threat to this market. But that just is the one thing that governments and banks cannot handle at this very moment. So, higher rates are not in sight for the near future. Therefore, a price earnings ratio of 15 to 16 for healthy, cash rich, multinational companies is not overly expensive.