Markets and Economy
5 Forces Driving the Bull Market
Jim Glassman, Head Economist, Commercial Banking
October 11, 2017
The stock market has continued to climb over the past year, with broad equity indexes rising more than 20 percent in that time and generating some $5.2 trillion in wealth for Americans’ portfolios since last fall. But with the economy now in its ninth year of recovery from the Great Recession, some analysts are questioning whether the bull market is sustainable. A closer look reveals that the forces driving the market’s rise are far from exhausted, with five major factors supporting continued economic growth.
- Stronger Growth Abroad
Japan and Europe are finally seeing the benefits from quantitative easing programs enacted in 2013 and 2014. Growth in these and other foreign markets has helped spur demand for US goods abroad, as seen in the pickup in US exports.
- An Energy Windfall
The 2015 global oil glut caused turmoil in the stock market, as falling prices immediately depressed revenues for the energy sector. But energy prices are now stabilizing, supporting the resumption of exploration in domestic shale fields.
At the same time, households have begun to spend the money they saved from low gas prices, as evidenced by the household saving rate, which has fallen 2.4 percentage points since peaking in 2015. The increase in household consumption is providing a broad tailwind for the market.
- Rising Stock Valuations
With major stock indices posting a string of all-time highs, it’s natural to wonder if equity prices are still supported by the fundamentals. But as a ratio of corporate earnings, stock valuations today are consistent with levels seen at the peak of past business cycles.
The market took an unusually long time to reverse its recessionary losses. Following the 2008 downturn, price-earnings ratios remained depressed for several years, holding near 20-year lows. Valuations have only recently climbed to a level that has historically accompanied periods of economic strength.
- The Evaporation of Anxieties
Recent years have seen a series of credible threats to the global economy. In 2015, the Greek debt crisis cast the European Union’s survival into doubt. A year later, fears that China’s economy was slowing drove a 20 percent drop in the stock market. Now that these threats have receded, investors can plan with greater confidence.
Fears of secular stagnation have also largely evaporated. For years, some analysts believed that the economy had entered a new era of underemployment and slow growth, but the labor market has actually improved.
- The Labor Market Weathers the Storm
While this year’s hurricanes have caused economic losses, they’ve had a relatively small impact on the labor market. The storms caused a spike in layoffs, but the fallout hasn’t appeared to spread beyond the affected regions.
Within storm-damaged states, the labor market is already recovering. In the wake of Hurricane Harvey, approximately 132,000 people filed new applications for unemployment insurance in Texas, but the number of people actually receiving benefits—which is a good indicator of the unemployment caused by the hurricane—has increased by only about 40,000. This is likely the result of people rapidly returning to work as the rebuilding effort gets underway.
In Florida, the initial spike of 21,000 new unemployment applications following Hurricane Irma appears to have been more than offset by reconstruction hiring. The state’s unemployed population has actually declined by 6,000 since the storm.
Rising stock prices reflect investors’ optimism. The US economy is on firm footing and the market expects sustained future growth. Strong domestic demand and resurgent markets abroad are producing a sunny outlook for American businesses, and there is little reason to believe these trends will reverse in the near future.
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