Three Reasons Why This Stock Market Can Accelerate on Bad News
It’s now the avalanche of corporate earnings season, and so far, it’s not too bad.
There are going to be disappointments. And there will be even more disappointments. But on balance, I don’t care what anybody says; in the U.S. economy and the global economy, any growth is good.
The stock market is going to go where it’s going to go, but the most important factors are the earnings, revenues, balance sheets, and corporate outlooks.
Here’s why the stock market can go higher:
Institutional investors have money that needs to go to work. Money is flowing back into the stock market, and investors don’t pay fund managers to sit on cash. Fund manager BlackRock, Inc. (NYSE/BLK) announced very good first-quarter earnings and net new inflows of funds grew to $39.4 billion, of which $33.7 billion was for the stock market.
It’s early, but earnings last quarter weren’t bad for a lot of companies, and blue chips all around are reporting growth. Certainly, not every company is going to meet or beat earnings expectations, but when you have a mature corporation like Johnson & Johnson (NYSE/JNJ) report first-quarter revenue growth of 8.5% (10% if not for the stronger dollar), that’s impressive in the global economy. Lots of other blue-chip companies are reporting solid numbers—numbers that have beat expectations. The numbers aren’t perfect in large-cap technology, but old economy companies are holding up, as are most banks.
The Fed and Interest Rates
The Federal Reserve is absolutely committed to reinflating assets. It’s been doing this for some time now and, according to the stock market, it’s working. But most importantly—even more important than quantitative easing—is the stated commitment of the U.S. central bank to keep interest rates low for the near future. Even though there is inflation in the U.S. economy, the data that the Federal Reserve’s interest rate policy is based on suggest that inflation is not something that needs to be addressed now. Accordingly, monetary policy is still very favorable for the stock market.
Corporations have tons of cash in the bank, dividends are going up, share buybacks are being announced, and there remains no other real place for an investor to put money for the longer term with the expectation of beating the rate of inflation.
Of course, prudence shouldn’t be thrown out the window. This is a stock market that has already gone up and is basically a momentum play.
At some point, probably in the not-too-distant future, the stock market should experience a major correction. This, followed by consolidation, would be a very healthy development.
Corporate earnings and positive earnings outlooks are key to this stock market going forward. I think the stage is set for more capital appreciation, followed by a major retrenchment.