Why Is The Market Still Ticking Higher?

In case you haven’t noticed, this bull market is now officially the longest one in market history. For investors, this is a great time to be alive.

The numbers explain exactly how great. On March 6, 2009, at the worst of the financial crisis, the Dow Jones had plunged to 6627; on October 3 of this year it closed at an almost all-time high of 26,750 – an exceptional bull run by anyone’s standards.

Amazingly, stocks are still rising. Rules that have guided investors for decades – about the importance of valuations, the duration of a bull market, the concern about corrections – all seem to be a thing of the past now.

So why has this become the longest bull market in history? Analysts offer a number of explanations. For one, stocks had fallen to exceptionally low prices during the terrible selloff in 2008-09, making many of them not only very attractive but oversold. Another is that government stimulus programs helped stabilize the economy, and the benefits from that spilled over to the stock
market.

Moreover, in recent years, interest rates had fallen to all-time lows. There was literally almost nothing to be gained by putting money into CDs; investors and savers decided they could do better by purchasing stocks.

Climbing The Wall

In fact, the market rebounded sharply during the Obama administration. But they’ve done even better since Donald Trump was elected in 2016. Stocks have gained nearly 50 percent, an exceptional performance on its own and even more so since it has followed the strong gains made in the previous years.

Amazingly, even after these gains investors remain bullish because of a variety of policies initiated by the Trump administration. Those policies include:

*Tax cuts, which are leaving more money in many people’s pockets. Companies have gotten an even bigger break, so monies that otherwise would have been used to pay taxes now fall to the bottom line, boosting profits sharply. Also, companies now have more incentive to expand their businesses.

*Repatriating trillions of dollars that had been parked overseas, resulting in a strengthened US dollar.

*Improving US economic data, such as the record-low unemployment numbers, indicate that the economy is getting stronger; this encourages more people to invest in stocks and now more of them have the means to do so.

Climbing The Wall

There’s an old saying on Wall Street that the market climbs a wall of worry, and in the last two years it did exactly that. For example, there have been political pressures at home, horrible threats from North Korea, heightened tension with Russia and Iran, fears of an all-out trade war with China, the currencies of many countries plummeting, increasing national debt, and other concerns. Despite these, the markets are at all-time
highs.

Falling Supply = Higher Stocks

These trends will very likely continue, but there is perhaps an even more important reason why stocks could advance – one that gets very little notice. This one has to do with supply and demand.

The demand for stock is growing, but the supply is declining, and this suggests that the good times will continue to roll.

Here’s how an article on Goldseek described the shrinking stock supply. “The three major US stock market ‘pools’ are all shrinking in a dramatic and stealth fashion,” it notes. A closer look at these stock market ‘pools’ puts this in clearer perspective.

First, the number of publicly traded companies in the US has been declining steadily. According to data from the Center for Research in Security Prices at the University of Chicago Booth School of Business, in 1996 there were 8,023 publicly listed US corporations. This number has dropped to 3,627 by 2016, a 55 percent decrease.

Meanwhile, the population of the US has grown nearly 50 percent since 1976, so the drop is even more significant on a per capita basis. In 1976 there were 23 publicly listed companies for every million people; in 2016 there were only 11.

An even more important reason is the reduction of shares outstanding at major companies. In the past 5½ years, these firms have purchased $1.5 trillion worth of their own shares – an unprecedented amount. But according to the Wall Street firm Goldman Sachs, corporate buybacks in 2018 will approach $1 trillion, thanks to Trump’s tax plan, repatriation of trillions of dollars, and still very low interest rates, which spur firms to borrow money by issuing debt. Some of the money they borrow goes to repurchase shares.

What this means is that the float of shares (the number of shares a company has that are not held by insiders, employees, and the company’s pension plan), is shrinking dramatically. Increasing demand and decreasing supply translate to higher share prices.

“We suspect that mergers and acquisitions will be the answer...to slowing corporate growth, using inflated stock as the currency, which will further aggravate the shrinking stock pools phenomenon,” Goldseek concludes.

The market has a way of outsmarting even the most talented analysts, so what happens in the future is anybody’s guess. It’s interesting to note that, historically, in the days immediately before Parshas Noach is read, the chapter in the Torah that describes the Great Flood, the market has suffered some of its worst declines.

This dates back to the early 1900s, and also includes the crash in 1929, the crash in 1987, and the terrible selloffs in 1978 and 1979 crash. Exactly what the connection is can’t be explained – but it’s there. Also interesting to note is that in 1987, press accounts of the plunge used so many water analogies: sell orders came pouring in, the market was deluged with sell orders, a flood of sell orders, and the like. Hopefully, this year won’t add to this unfortunate record.

 By Gerald Harris

Sources: businessinsider.com; fool.com; goldseek.com; macrotrends.net.