This Current Bull Market: Why Stocks Keep Advancing
The investment world is rife with compelling adages, many of which contain nuggets of wisdom. The current bull market we find ourselves in highlights a classic: "Bull markets climb a wall of worry." Simply put this means that stock prices are (generally) rising despite economic problems, geo-political uncertainty, or a general lack of positive news. Why is that? In this post we consider some factors we think are causing markets to climb this "wall of worry".
Corporate earnings are strong.
This past year has witnessed corporate earnings increasing, broadly. If we think back to early 2022, the prevailing outlook was that higher interest rates would hurt the economy, consumer spending and thereby lead to lower earnings. Consider the past 10-years of US corporate profits. We see only a small decline in earnings, demonstrating that companies were able to withstand higher interest rates and ultimately raise their earnings. Since investors are keenly interested in future earnings, these uplifting expectations for earnings have elevated stock markets.
Resilient Consumers and Low Unemployment Rates
A meaningful component of this strength has been the resilience of consumers, who continue to spend with the support of low unemployment rates. In Canada we currently have 6.20% unemployment which brings us back to pre-pandemic rates. For reference, the US has an even tighter labour force with unemployment of only 4.0%. If we think back to economic forecasts at the outset of the inflationary surge in early 2022, the view was that unemployment would increase materially, as it had in past inflationary cycles. Yet this time we have not experienced such a change, helping consumers weather the higher prices they are subject to.
Some economists have argued that the difference between the unemployment rates in Canada and the US has contributed (in concert with other forces) to help US markets outperform Canadian ones. Either way, we are delighted to see that taming inflation has not thus far required a high price to be paid by Canadian workers who would have historically lost their jobs to quell inflation.
Just as consumer confidence has been surprisingly strong, business confidence has as well. Since the launch of ChatGPT, businesses have been rushing to incorporate Artificial Intelligence (AI) into businesses to expand sales, improve customer service and reduce costs. This spending has pushed up stock market valuations, with some specific AI-related companies reaching heights we find concerning (and are monitoring closely). The sum of these forces is that consumers and companies have been more resilient than previously forecasted.
Bringing It Together
Another great Wall Street adage is "The bearish argument always sounds more intelligent." Just as we have outlined some key reasons why the economy, consumers, and businesses have remained surprisingly resilient, we are mindful of the counter argument to each of these data points. It is common now in the financial media to reframe each of these data points to highlight worrisome thoughts of overextended consumers, or a bubble in technology stocks (that have been rapidly advancing), or a pending economic slowdown. Just look at the debate on the outlook for Canadian real estate prices for evidence of how pervasive pessimistic arguments, often with compelling arguments behind them, are right now. While we are ever-vigilant in studying bearish arguments, we are not surprised how the culmination of factors we discussed above have caused markets to climb this wall of worry. What are your thoughts?
The information contained herein has been provided by MacMillan Keeping Wealth Management and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance. Links to other websites from this document are for convenience only. No endorsement of any third party products, services or information is expressed or implied by any information, material or content referred to or included on, or linked from or to this Website.
Corporate earnings are strong.
This past year has witnessed corporate earnings increasing, broadly. If we think back to early 2022, the prevailing outlook was that higher interest rates would hurt the economy, consumer spending and thereby lead to lower earnings. Consider the past 10-years of US corporate profits. We see only a small decline in earnings, demonstrating that companies were able to withstand higher interest rates and ultimately raise their earnings. Since investors are keenly interested in future earnings, these uplifting expectations for earnings have elevated stock markets.
Resilient Consumers and Low Unemployment Rates
A meaningful component of this strength has been the resilience of consumers, who continue to spend with the support of low unemployment rates. In Canada we currently have 6.20% unemployment which brings us back to pre-pandemic rates. For reference, the US has an even tighter labour force with unemployment of only 4.0%. If we think back to economic forecasts at the outset of the inflationary surge in early 2022, the view was that unemployment would increase materially, as it had in past inflationary cycles. Yet this time we have not experienced such a change, helping consumers weather the higher prices they are subject to.
Some economists have argued that the difference between the unemployment rates in Canada and the US has contributed (in concert with other forces) to help US markets outperform Canadian ones. Either way, we are delighted to see that taming inflation has not thus far required a high price to be paid by Canadian workers who would have historically lost their jobs to quell inflation.
Just as consumer confidence has been surprisingly strong, business confidence has as well. Since the launch of ChatGPT, businesses have been rushing to incorporate Artificial Intelligence (AI) into businesses to expand sales, improve customer service and reduce costs. This spending has pushed up stock market valuations, with some specific AI-related companies reaching heights we find concerning (and are monitoring closely). The sum of these forces is that consumers and companies have been more resilient than previously forecasted.
Bringing It Together
Another great Wall Street adage is "The bearish argument always sounds more intelligent." Just as we have outlined some key reasons why the economy, consumers, and businesses have remained surprisingly resilient, we are mindful of the counter argument to each of these data points. It is common now in the financial media to reframe each of these data points to highlight worrisome thoughts of overextended consumers, or a bubble in technology stocks (that have been rapidly advancing), or a pending economic slowdown. Just look at the debate on the outlook for Canadian real estate prices for evidence of how pervasive pessimistic arguments, often with compelling arguments behind them, are right now. While we are ever-vigilant in studying bearish arguments, we are not surprised how the culmination of factors we discussed above have caused markets to climb this wall of worry. What are your thoughts?
The information contained herein has been provided by MacMillan Keeping Wealth Management and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance. Links to other websites from this document are for convenience only. No endorsement of any third party products, services or information is expressed or implied by any information, material or content referred to or included on, or linked from or to this Website.
