In meeting with clients this summer, the most frequently asked question was, “Why does the stock market keep going up?” Of course, there are variations of this question which range from “How does the market go up with all the distraction in the U.S. government,” to “This bull market is very long, how can it continue?”
On the surface, it does seem odd that the market continues to move higher. There have been a lot of ‘interesting’ comments coming from the White House, which in a different time may have caused the equity market to decline or at least pause. The average economic expansion since 1900 lasted 47 months, however, the one we are currently in has lasted 98 months, thus far. The economic expansion has contributed to a bull market, which began in March 2009, that is now up close to 260%! In addition, there are a litany of geopolitical issues ranging from riots in Venezuela, an expanding Chinese navy, and North Korean missile tests, which combined are pushing the rise of populism in Europe and the constant Middle East conflict to the backburner. Besides, whatever happened to the old cliché of sell in May and go away? For the year, the S&P 500 is up just over 11%, which includes more than 1.5% appreciation since June 1.
There are a variety of reasons why the U.S. equity market is up, but arguable the most important factor is the earnings of U.S. companies. Earnings have been good this year, very good. And, expectations for earnings for the remainder of the year and into 2018 are solid. This comes on the heels of flat to down earnings from 2014 through the first half of 2016. Furthermore, once earnings are finalized for the second quarter, it looks like operating margins achieved their highest level of any quarter in the last decade!
James Carville, campaign strategist for President Bill Clinton, is credited with the phrase “It’s the economy, stupid.” As we think about the gains in U.S. equities this year, perhaps a variation of this phrase, “Follow the earnings, my friend” is more appropriate.
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Source: JP Morgan