It has been an incredibly exciting and highly-profitable journey for many US stock market investors over the last decade.
Who would have thought, some 9-1/2 years ago, that the Dow Jones Industrial Index would climb continually without ever registering a 20% drop? The extraordinary ascent marked the longest bull run in American stock-market history.
Since March 2009, the S&P 500, which is a broad measure of the US stock market, has risen some 300%. The rise has not only benefitted American investors but also lifted stock market in other parts of the world too….
Doubles all round
…. the Straits Times Index has doubled; the Hang Seng in Hong Kong has risen 156%, while the Kuala Lumpur Composite Index has put on 116%, over the last decade.
It certainly didn’t pay to be out of the market.
But there were hiccups along the way. However, they were nothing that the market couldn’t handle, thanks to the steadying hands of three very capable US Federal Reserve chiefs.
Throughout the US economic recovery, the Fed has kept interest rates low and injected trillions of dollars not only into the American economy but into the rest of the world too.
Oodles of cash
The combination of oodles of available cash at rock-bottom interest rates has helped to revive economic growth, restore consumer confidence, boost bank lending and improve corporate profits around the world.
It is little wonder that stock markets have risen. Investors just love rising profits.
Additionally, companies have been buying back their own shares, which has helped to lift earnings per share. It is estimated that between 2007 and 2016, American companies spent as much as half of their profits on share buybacks.
There is something else….
….. American technology companies have been on a tear. The advance of shares in Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), (Nasdaq: AAPL), Netflix (Nasdaq: NFLX), Alphabet (Nasdaq: GOOGL) and Microsoft (Nasdaq: MSFT) have accounted for nearly a-fifth of America’s bull market gains.
And the tech titans are far from done, yet. But things could be about to change.
US interest rates have been on the rise. And they are expected to continue rising, albeit at a gradual pace, according to the Fed chair, Jerome Powell.
However, the pace of increase will depend on factors that are still unquantifiable.
The US tax cuts, for instance, have yet to properly reach the pockets of American consumers. So, their impact on inflation hangs in the balance.
The ugly ongoing trade war between the US and China is another unknown quantity.
At the moment, it is having negligible effect on US inflation. But It could push up consumer prices. That could force the Fed to act.
Who knows what that might do to global economies and stock markets around the world?
For instance, even the modest increases in US interest rates to date has lifted Treasury yields to what some might consider to be appealing levels.
Cautious investors can now earn a risk-free rate of around 3%, if they want. And as interest rates rise further, US Treasuries could look even more tempting. Stock markets could be vulnerable.
The rise in US interest rates has also made the dollar considerably more attractive. Consequently, it has sucked money out of emerging markets, driving down the value of some developing-economy currencies.
The Turkish lira, the Indian rupee and the Indonesian rupiah have all been affected.
It is looking increasingly likely that we are either at the start of another interesting journey for investors or nearing the end of the historic bull run.
These are unquestionably worrying times for investors. But they can also be exciting times for those who know where to look for investing opportunities.
A version of this article first appeared in Take Stock Singapore.
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