Tag Archive | "Stock Market Surge"

Factors Likely To Cause The Next Stock Market Surge


Taking The Bullish Side | What Could Cause The Next Stock Market Surge

Stock Market SurgeWith the constant drone of doom and gloom regarding what could cause the next stock market crash, it is worthwhile to take a look at the factors that are likely to cause the next stock market surge.  While the stock market is a constant tug between bulls that expect the stock market to go higher and bears that expect it to go lower, the reality is that over long periods of time, the stock market goes higher because underlying economic growth an earnings increase over time.  For this reason, it is important for long-term investors to not overemphasize bearish stock market outlooks and to keep their investment thesis focused on long-term growth.  While it is prudent to be aware of bearish stock market scenarios, and at times take measures to hedge a stock investment portfolio against a bear market sell-off or stock market crash, it is important to understand what factors could lead to a stock market surge.

Bullish Factors That Could Cause The Next Stock Market Surge

Although there are very painful stock market sell-offs, some of which can be quite severe, these sell-offs are actually buying opportunities for investors invested in stocks for long-term purposes.  It may take the market years or even decades to recover from a severe bear market sell-off or crash, but just as winter always turns into spring, the stock market always recovers and surges higher over time.  The reason why the stock market always goes up over time is because economic growth and corporate earnings, which underpin stock valuations, always recover eventually, even from severe economic recessions.

Investing In StocksWhile some investors try to time the stock market to get into and out of investments for additional gains, market timing is a risky way of investing.  Studies have found that a handful of days each calendar year account for the majority of gains in the stock market in a given year.  Market timers run the risk of missing the surge days that bring the stock market to higher trading levels.  With this in mind, and a lot of talk of a near-term stock market top, it is worth considering the bullish point of view and the factors likely to cause the next stock market surge.

  • Better Economic Growth In The Spring / Summer – With the severe winter of 2014 in the rear view mirror, a lot of projects and economic growth that was delayed during the cold winter months will likely force a surge in economic growth during the spring and summer of 2014.  There are already signs of the economic up-tick that naturally accompanies warmer weather after an unusually cold winter.  Unemployment claims have hit multi-year lows in the later half of March and a strong 200,000+ employment report is expected when the March numbers are reported.  This momentum in the job sector should carry into the spring and summer, and result in higher consumer spending and stronger economic growth.
  • Corporate Earnings Continue To Grow at a Healthy Pace – What underlies stock market rallies is healthy growth in corporate earnings, which provides justification for stocks to move higher.  Unlike the last two times that stock market indexes were at record levels, this time around the underlying corporate earnings are strong enough to justify stock prices at current price to earnings ratio (P/E ratio) levels, as average forward P/E ratios for stocks are within the long-term average of 15.  Continued anticipated corporate earnings growth should be strong enough to allow stocks to appreciate at least another 10 to 20 percent over the next two years.
  • Stimulus in China and Europe – There is no doubt about it, China has been in an economic funk lately.  Not a recession like people in the United States are accustomed to, but an economic slowdown that has many investors around the world concerned that the world’s second largest economic engine might not provide the economic growth that the world economy needs to continue a healthy growth rate.  However, Chinese leaders are not sitting idly by as their economy sours.  There are already rumors of further economic stimulus and reforms from the Chinese government that could cause the world economy and stock markets to react favorably.  There is also talk of additional measures being taken by the European Central Bank (ECB) to combat signs of deflation in some European economies, most notably Spain.  A cut in the European Central Bank’s lending rate, or “quantitative easing” measures, could give the Eurozone economy a dose of stimulus and cause stocks across the world to rise in response.
  • Few Other Investment Suitable Options – One of the factors that have kept stocks in rally mode for the better part of five years has been the fact that other investment options are not very appealing in the current economic environment.  Cash investments, from money markets to Certificates of Deposit (CD), earn such low rates of return that they do not even keep up with inflation.  Bonds, while paying better interest rates than cash investments, are quite expensive after years of low interest rates, and will eventually revert to the mean and lose value.  That leaves stocks as the best investment option for many investors, which has kept a strong bid in the stock market every time the stock market indexes dip.  While the United States stock market and economy have had their share of turmoil over the years, the reality is that the United States economy is still one of the most stable economies in the world, which brings in investors from around the world.

Stock Market Performance Since 2009

  • Investors Coming Back to the Stock Market – After years of being afraid to put their money into the stock market, in the wake of the severe 2008 / 2009 bear market, investors are once again feeling comfortable investing in stocks.  This is not to say that right now is an optimum time to put fresh money to work in the stock market, as the market may very well be working its way back to a bubble, if it continues to rise at double digit rates for several more years.  But, as the saying goes, “don’t fight the tape.”  The stock market tape is in rally mode, and the direction of the stock market will likely continue higher until some event, such as a geopolitical event or a new recession, causes the bull market to run out of steam.

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