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Why the Stock Market Boom Will Last Until 2015By
Thursday, May 16, 2013
The stock market boom so far has been incredible... And it isn't ending any time soon...
The Dow Jones stock index is up 22% since November. It's hitting new all-time highs. And most people are worried that a bust is just around the corner. But those people don't get why the market is going up...
This stock market boom is not about an improving economy, improving home sales, or improving corporate revenues. It is about stimulus from the Federal Reserve.
So the question becomes, when will the Fed's stimulus end?
Here's what you need to know...
The "Bernanke Asset Bubble" is shorthand for my long-term thesis that asset prices – namely U.S. stocks and U.S. housing prices – can and will soar to unimaginable heights, thanks to the Fed's commitment to keeping interest rates low.
You see, low interest rates force investors out of bonds and into stocks and real estate. And the Fed isn't going to let interest rates rise any time soon.
The Federal Reserve has a "dual mandate" – it's trying to accomplish two things.
It wants to 1) keep prices stable and 2) keep people employed.
The Fed has laid out its specific targets... It wants to see the unemployment rate below 6.5%. And it wants inflation to get up to 2%.
It will keep stimulating the economy until its objectives are met.
Today, the unemployment rate is 7.7%. A survey of 75 economists forecast that the unemployment rate will fall gradually to 6.9% in the fourth quarter of 2014. This works out to unemployment going down by roughly 0.1% a quarter.
And today, the inflation rate (as measured with the Fed's favorite inflation measure, the "core PCE") is 1.1% – well below the Fed's target of 2%. Bloomberg's survey of Wall Street economists says that the inflation rate will still fall short of the Fed's target... with estimates of 1.5% for the fourth quarter of 2013 and 1.85% for the fourth quarter of 2014.
Unless something drastic happens, unemployment is not going to fall fast enough and inflation is not going to rise fast enough to cause the Fed to stop stimulating the economy any time soon.
The simple conclusion here is that the Fed will continue "juicing" the U.S. stock market at least through the end of 2014. It will not get in the way of this boom.
Don't over-think it. The message is simple: Own U.S. stocks.
This is a 100% Fed-driven stock market. And the Fed stimulus will continue... for a while.
Invest accordingly.
Good investing,
Steve
Further Reading:
Low interest rates and low inflation will help "propel stocks to levels higher than anyone can imagine," Steve writes. "I believe the stock market could rise 95% in the next three years. But if you position yourself correctly, you could make much more than that."
Market Notes"THE DEPOT" IS ENJOYING A HUGE UPTREND Another week goes by... and "The Depot" tells us things are a heck of a lot stronger than the pessimists would have you believe.
Over the past few years, we've highlighted many charts that reveal an important idea: While the U.S. economy isn't booming, it can't be doing all that bad. For example, we've noted the tremendous share-price strength in giant hotel operator Wyndham Worldwide and super-bank Wells Fargo.
But let's not forget about Home Depot (NYSE: HD). Owning and maintaining a home is the American dream. "The Depot" is America's largest home improvement chain. It sells the things we need to install new kitchens, remodel bathrooms, and build home additions. This makes Home Depot's share price an excellent gauge of what's happening in America.
As you can see from today's chart, things are "happening." Two years ago, Home Depot shares traded for $35. Since then, business has been good enough to send the stock more than 100% higher. Just yesterday, shares struck an all-time high. If "The Depot" is doing this well, things can't be all that bad!
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