Why Stocks Keep On Rallying

Why Stocks Keep On Rallying
Traders on the floor of the New York Stock Exchange on April 7. DREW ANGERER/GETTY IMAGES
|Updated:

In normal conditions, stock market functions are a barometer for the economy. Good earnings and economic activity drive stocks higher. Valuations are another factor: Are stocks cheap in terms of their earnings, and are they paying a high dividend yield?

This stock market is different: Earnings have been falling, until the most recent earnings season; the economy has been lukewarm, though not terrible; and different valuation metrics are at the previous bubble peaks of 1929 and 1999. Currently, the S&P 500 pays less in dividends (1.9 percent) than the 10-year Treasury note does in interest (2.2 percent).

All these fundamentals have been begging for a bear market in stocks for several years now, but it has never come. In fact, the S&P 500 just made a new record high of 2,445 on June 9 and is up 8.62 percent for the year and 84 percent over the last five years—not a shabby performance. Not even political gridlock, the risk of war, and Federal Reserve (Fed) interest rate hikes can shake the market this year.

So why aren’t stocks correcting? It turns out there are a few good reasons as to why stocks have rallied for so long.

Central Bank Support

By far the biggest reason for the prolonged rally, in spite of lukewarm GDP growth and sky-high valuations, is continuing money-printing by not just the Fed but by all global central banks.

Federal Reserve Board Chairwoman Janet Yellen holds a news conference following a meeting of the Federal Open Market Committee in Washington on March 15, 2017.(Chip Somodevilla/Getty Images)
Federal Reserve Board Chairwoman Janet Yellen holds a news conference following a meeting of the Federal Open Market Committee in Washington on March 15, 2017.Chip Somodevilla/Getty Images
Valentin Schmid
Valentin Schmid
Author
Valentin Schmid is a former business editor for the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.