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Why US stocks are still surging up?

As of today, 2014-06-27, we are still yet to see any significant correction in the US stocks.  Low interest rates, low inflation and steady growth are often cited by the market bulls for the continuation of the market surging.

But David Kotok of Cumberland Advisors listed down 6 reasons why US stocks continued to rally in the second quarter and still look attractive compared to other asset classes:

  1. The short-term interest rate remains close to zero.
  2. Long-term government bond rates fell when they were expected to rise worldwide.
  3. Reports of worldwide inflation continued at very low levels in most jurisdictions. In Europe, the inflation rate is now recorded at 0.50%.
  4. Central bank policies continue to be expansive. Even though the Federal Reserve is tapering, it is still expanding excess reserves and acquiring assets onto its balance sheet.
  5. The federal deficit continues to shrink. It has gone from a run rate of $1.4 trillion at its peak to an annualized run rate of $400 billion, and the number is falling.
  6. The growing U.S. energy self-sufficiency is evolving and is resulting in shrinking trade and current-account deficits. We do not import as much oil and energy as we used to. We produce much more. The trends continue in that direction. That means that dollars do not flow abroad; therefore, those dollars do not have to be attracted back to the U.S. by higher interest rates or other investment returns.

To me, there are other factors and one of the most prominent one is – “Central banks are planning to cut their exposure to longer-term debt to protect themselves from losses when the the Federal Reserve ends its bond-buying this autumn.” 

Indeed, the survey of 69 central bank reserve managers – controlling about $6.7tn, or more than half of central banks’ total reserves, polled in May by Central Banking Publications and HSBC, suggested many have already started to move into riskier assets, such as equities.  That trend looks set to continue, with just under half of those polled saying they could envisage buying shares or exchange traded funds.  Others said they would cut the duration of their bond portfolios.

What would we expect?  If the US were to end its bond-buying this autumn, we would expect dollar to be strengthen in anticipation of the next phase - US would the hike of interest rate.  That would be the period, we believe that the market corrections would kick in. 

Reference:

  1. MarketWatch, The Tell, 2014-06-26, “6 Reasons Why Stocks Are Still Setting Records and 1 Reason to Trim Longs”
  2. Financial Times, Claire Jones, 2014-06-23, “Central Banks Set to Cut Debt Holdings”