Facts Do the Heavy Lifting

Facts are doing the heavy lifting in this stock market

What does a rising stock market tend to do as it powers its way to new highs? It tends to push higher as long as prospects seem favorable. What makes for favorable prospects on Wall Street?

Weekly positive economic headlines act like time-released medicine for the stock market. Each ongoing encouraging headline acts as a confirming stimulus that business growth will continue to expand.

That was your crash course in why the stock market goes up and hints at what historically makes a market go down.

The Market Climbs a Wall of Worry

Considering the fact that interest rates are moving higher, but still historically low, in spite of the Sep. 26, 2018 rate hike, shouldn’t the market be more concerned about the rising cost of capital? Eventually, the markets will care deeply about rising rates but only when the economic muscles (data points) start to contract.

Capital demand indicates that earnings should continue to grow. Yet, market participants are becoming increasingly aware that growth comparisons, as measured by corporate earnings, should become more difficult to beat. The implication, at that point, is that the business cycle expansion is topping out, or worse, lacking a new stimulus, has topped.

The adage, “No man’s life, liberty or property are safe while the legislature is in session,” may be starting to ring true.  The fact is that the political climate is at a low boil, for now. The market cares more about the data it sees than political drama affecting egos but not the economy.

Stubborn political divide tends to mean that nothing will change for now. The status quo remains which means no uncertainty. The market doesn’t fear being upset by legislation because political gridlock assures nothing gets done. It actually lessens uncertainty, but it is still good Kabuki theatre.

The market’s working theory is that it will not be the proverbial frog in the 2018 cauldron. The market feels that trade and tariff issues will be resolved favorably. Even though tariff news is still making the occasional headline de jour, any selloff in the market is quickly bought. Why would mega money managers do that? There’s no outstanding strong correlated data that tariffs have indeed had major negative effects.

When the economic cauldron is drained, the residue would appear to spell uncertainty. The market hates nothing more than uncertainty. Nothing. With that in mind, what does the overall upside behavior of this 2018 market tell us?

Is it different this time?

Seeming to confirm an oft-repeated Wall Street phrase that “this time is different,” a reference to 2016 to present time period dripping with angst and uncertainty, it seems that the uncertainty became a countervailing floatation device. The market has held on to that working theory for the last two years, certainly since November 2016.

To market observers, the constant buying of pullbacks in price spells confidence.

Rewards from the tax stimulus plan of December 2017 are still working their way through the economy. Depending on who you read, the expectation is that this stimulus should fade by 2020. Two years is a long time for markets.

Confidence in the monthly economic data points serves to give the market both purpose and direction. In other words, just as Mr. Market seems to meet Chicken Little pointing to a falling sky, money streams back into the market with positive data thereby confirming the confidence.

News, like GDP growth jumping from 2.2% in the first quarter to 4.25 in the second is market fuel. The most recent Fed estimate is 4.4% in the third quarter of 2018. The market powers itself higher on future earnings growth potential. Period.

Need proof? First quarter SPX (S&P500) earnings were up 25.0%, along with 8.6% revenue growth, and second quarter SPX earnings were up 25.05%, with 10.0% revenue growth, says FactSet.com. The end result? The SPX is up ~9.0% since the end of June 2018.

Facts do matter, whereas opinions are often wrong in this market.

Uncertainty is inherent in the stock market because every minute of every day offers up a new market (the chaos theory butterfly effect).  Currently, uncertainty is weaker than positive expectations which move markets on real positive data.

As a Bottom Line

The bullish conspiracy continues:

  • Low interest rates
  • Earnings growth
  • Strong sales growth
  • The benefit of the lower tax rates

Meanwhile, the bearish perspective percolates with assorted mixed results showing developing cracks in previously positive economic trends, but nothing has changed major trends. The pace of growth will matter somewhat. But unless the equilibrium point where interest rates actually make earnings expansion less trustworthy, this market will follow its current uptrend.

Are predator bears, looking for a major sell-off, out there? Of course. But until they can get the bandages off their burnt paws to change the trend, bulls are in charge.

 

 

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About wallstreetpirate

Thirty-five years in financial services from insurance to registered investment adviser, and trader (now retired). Currently helping wanna-be traders and experienced alike as a trading coach and mentor. I've been in and around, on top of, in the middle of, and on the bottom of the stock market for a long, long time. Here's all I've learned: Trading is about behavior, psychology, and appreciating what the charts are saying technically. You can't fake it. Either you know what you're doing or you don't. And as much as this isn't rocket science, it takes knowledge and a skill set to survive.
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