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The Stock Markets Rise May First Be Starting – Daily Run Down June 5

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Well, the Nasdaq closed at another record high and took out its old intraday high from back in the middle of March. It is surely feeling different these days, isn’t it? It is like all the doom and gloom just melted away with the summer heat. But ask yourself has anything changed since let’s say February? I do not think much has changed at all if anything we have received more confirmation over the past couple of months about what I have been trying to communicate about every day. Earnings are strong, the economy is strong, jobs are strong, and inflation is low. To me, that seems like a perfect recipe for a stock market that is likely to continue to rise.

A Strong Economy Lift All Boats

Do you want evidence of this? Is the chart below proof enough for you? Just eyeballing it, you see the correlation that exists. A healthy economy garners strong corporate earnings and a strong stock market.

US Real GDP data by YCharts

I know everyone focuses these days on things like inflation or rates, but why? What is the big deal if rates are 3 percent on the 10-year. Does it even matter?

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The Days of Crazy Inflation and High Rates

I’m not even old enough to remember, but I have heard stories from my parents about them getting mortgages at 10 to 12 percent in the early 1980’s! It turns out rates went as high as nearly 17 percent at one point. Imagine borrowing a 30-year mortgage at 17 percent!

But despite all those crazy interest rates, the median home price in 1971 was $25,800, and by 1983 it was nearly triple at $73,300. Just look.

 

How can that be you ask? Because income levels were rising at a much higher pace. In fact, in 1981, personal income rose at nearly 13.8 percent. Today it grows at 3.8 percent.

Despite all the crazy inflation rates and economic malaise, the S&P 500 managed to rise an astonishing 44 percent from 1970 to 1982. Was it a smooth ride? No. But still

^SPX data by YCharts

Why? Because corporate profits were rising, and from 1970 until 1982, corporate profits nearly tripled!

Can rising rates or rising inflation kill the stock market? In short no. Not if profits are growing at an even faster pace.

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A look on Back on Rates

The next time someone starts’s talking to you about the abnormally low-interest-rate environment, show them this chart. This is my favorite chart of all time, up there with the velocity of MZM.

You can not dispute this chart. The UK Consol Bonds provide more than 300 years for data showing just one thing. The period of 1970, 1980, and 1990’s was the anomaly, not now.

You can count on your hand the number of times before 1960 interest rates went above 5 percent.

In 2009 a very very very smart investor told me the best hedge against inflation are stocks.

I have never forgotten that, and you shouldn’t either.

-Mike

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-Mike

Photo credit via Flickr

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future. 

#stockmarket #inflation #rates #housing #prices #income #sp500