Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Can Stock Market Continue to Rally Without the U.S. Economy?

Stock-Markets / Stock Markets 2013 Apr 19, 2013 - 11:05 AM GMT

By: Money_Morning

Stock-Markets

Shah Gilani writes: We haven't stepped into the Twilight Zone, but it certainly seems that way when stocks are hitting historic highs yet the economy is still so weak that the Federal Reserve is printing money like a Third World nation.

It has the makings of a great prize fight between the largest market in the world and the largest economy in the world.


Can we keep this up? Is this titanic battle going to last like the decades-long Japanese recovery? Will stocks punch themselves out? Can slowing earnings keep stocks soaring?

Here's the blow by blow so far on what's causing what I call the Great Discrepancy. Let me know who you think is going to overtake the other.

Below, I tell you what I think is underway.

Creating Value in the Stock Market
Let's address one of the most fundamental inputs in this situation: stock prices. Company valuations and their stock prices are a function of several inputs; the most important of which are earnings growth expectations and dividends.

One way to look at the price of a stock is to look at the present value of the expected future stream of dividends the company is supposed to pay out. In other words, when you get income from this company in the future, what's that worth to you now?

You don't have to apply any modeling to get to your valuation; the market basically does that for you by arriving at a consensus price that incorporates the discount model math.

Most companies that pay solid, steady dividends don't see their stock price fluctuate too much because they are yield-based investments more than go-go growth investments.

Prices of high-yielding stocks have risen and been strong because investors starved for yield in the fixed income markets have turned to these equities for the income they deliver. And growth investors that were burned in the 2008 meltdown have sought out yields for safety and steady growth.

That's making income investments very popular across all investor classes.

Dividends come out of earnings, so earnings are important. But for stocks that don't pay a dividend, earnings (or in the case of crazy Internet-type stocks, would-be earnings) are everything.

Earnings: Good News vs. Bad News
Steady-state earnings don't do much for stock prices. Earnings growth is the Holy Grail. The good news is that stock prices have been rising, justifiably, on better and better earnings.

The bad news is, those earnings, upon a deeper look, aren't sustainable if economic growth doesn't pick up.

Since 2009, earnings on stocks in the S&P 500 have risen collectively some 200%.

Most of those higher net earnings have resulted from cost-cutting, layoffs, productivity increases, favorable tax carry-forwards, refinancing old debt with cheaper low-interest loans, a weak dollar, and accounting gymnastics.

The bad news is over the same period top-line revenues have grown only about 10%.

In other words, in spite of deathly slow domestic growth in the U.S. and slow global growth, American corporations have benefited by leaning themselves out, globalizing their sales to where the growth is, and enjoying a positive currency translation when they account for overseas earnings in terms of cheap dollars.

Central Bank Steroids
Besides inherent valuation measures, stocks are subject to supply and demand equations. If there are more buyers than sellers on any given day, stock prices will rise.

The Federal Reserve and central banks around the world have been providing an extraordinary amount of buying power to short-term investors by flooding banking systems with trillions of dollars, as well as keeping interest rates at rock bottom levels, which adds to investor buying power.

All the stimulus money floating around the world means there's plenty of money to buy stocks, especially for financial institutions. And when there are more buyers than sellers, stock prices, and this has been happening worldwide, will rise.

So far that's all been well and good. GDP growth hasn't had to be the prime mover of stocks. Inherent factors and superficial stimulus have provided the market's fuel.

But, without strong economic growth, sooner or later, demand alone will prove inadequate in supplying top-line revenue and net earnings growth and stocks could fall.

The Reckoning
The market, which can still be saved hopefully long enough for GDP growth to kick in, and if sidelined investors keep pumping money into new positions, is nonetheless facing another headwind.

Share ownership and investor participation is dwindling in the U.S. as a stagnant economy is reducing the middle-class and their ability to invest in stocks.

According to Federal Reserve data from 2010, while 47.8% of the top 10% of income earning households in America owned stocks directly and 90.1% had retirement accounts averaging $277,000, in middle-income (the 40-60 percentile) households only 11.7% owned stocks directly and 52% had retirement accounts worth an average of only $22,800.

That's worrisome for the middle-class, the stock market and America.

Entering the 12th Round
The Great Discrepancy has been bridged so far. But, if U.S. domestic growth continues to be lackluster and global growth, which is already slowing, doesn't pick up robustly it's unlikely that soaring stocks can keep fighting against what looks like a rope-a-dope opponent.

Is the fight over? By no means. GDP growth can pick up if housing continues to recover, if energy prices keep falling, if manufacturing jobs get repatriated back here, if the Fed stays its easy money course long enough for growth to get to its knees, stand up and start swinging.

Then again, I watched the famous Muhammad Ali-George Foreman fight where Ali took a beating on the ropes from a wildly punching Foreman, until Foreman ran out of gas and Ali outlasted the opponent he called a dope.

That means, don't be a dope. Ride the rising market but use protective stops to take profits on the way up so you have a sack full of money to buy from the dopes who've forgotten that what goes up, must come down, when the big market hits the canvas.

I've been keeping an eye on this battle for some time and that's why I've crafted a successful strategy in my DealBook service where I help investors start to read the clues the market offers and find the opportunities those clues reveal.

Because in this kind of market, even when you're covered on the ropes, you're not going to win if you can't see your opportunities for knock-out punches.

Source :http://moneymorning.com/2013/04/19/can-wall-street-continue-to-rally-without-the-u-s-economy/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules