3 Forces To Keep Stock Prices Rising
As the bull market rolls on, investors must come to grips with the fact that stocks as an asset class are no longer cheap. Does this mean that the bull market will end soon? Not necessarily. With a host of potential market pitfalls on the horizon, the prudent investor may want to raise cash levels in the portfolio. At worst, the market continues to gain and the investor’s portfolio rises, albeit at a lower rate than the market as a whole. If a correction does ensue, the investor may be able to buy great companies at more reasonable valuations than are currently available in the market.
Predicting market tops and bottoms is a fool’s game, and the bull market could keep on going despite the fact that valuations are above average levels. But in order for stocks to keep rising, we believe three forces need to continue:
1. Job growth needs to continue
Wall Street cheered the most recent monthly jobs report, which showed that US employers added 223,000 jobs in the month of April. The report showed that employers resumed hiring after the previous month’s jobs report showed anemic growth. The US economy looks fine for now, but as more and more jobs are added, the US is getting closer and closer to full employment. The current unemployment rate stands at 5.4%. Federal Reserve Chairwoman Janet Yellen recently commented that full employment for the US economy to be 5.2%. The US unemployment rate nearing full employment is a cause for concern. As the US economy reaches full employment, the chance that US corporate profits are reaching a cyclical peak rises as well.
2. Interest rates must remain relatively subdued
The future path of interest rates is clearly higher. At some point the Federal Reserve will raise the federal funds rate, most likely in a slow gradual manner. If the fed is able to raise rates slowly enough, the stock market should be fine. However if US interest rates spike in anticipation of further rate hikes, the stock market could enter a bear market. One of the biggest drivers of earnings growth over the past several years has been stock buybacks. If rates rise, companies may reduce the pace of their stock buybacks. This would remove one of the nice tailwinds the market has enjoyed during the bull market. Rising interest rates would increase interest expense for corporations, which would directly reduce earnings. Additionally, as rates rise, the appeal of bonds vs. stocks increases.
3. The US dollar must moderate its strong climb
The strength of the US dollar is another factor that could work against the stock market. As the US dollar rises, US multinational corporations’ earnings from overseas are negatively impacted by the rising dollar. With the US likely to raise rates in the future, and many foreign central banks reducing rates, the US dollar may continue to strengthen, thereby reducing the appeal of US equities.
All of the ideas expressed in this article are the opinions of Ideal Asset Management LLC
Before trading on any of the information in this article, consider consulting your financial advisor to make it suits your financial goals
All investments carry the risk of loss