By: Bill and Cindi Porter, AILERON INVESTMENT ADVISORS
Q: What has been driving the stock market surge over the past few years?
A: Multiple factors, but a few of them are very noteworthy for investors
First, when the 2008 recession took hold, many companies thinned out their employee rolls and reduced their labor expense significantly. Since 2009, hiring levels have remained tepid at best. Companies have remained lean and mean. Employee costs have remained lower than normal and thus, the bottom lines have been more profitable. This, however, is no longer an area offering any meaningful additional future savings.
Second, the cost of money has been historically cheap for the past eight years. The Federal Reserve has kept interest rates (the cost of money) at nearly zero. Now that the election is over, the Fed has already raised rates once and has announced that more rate increases will follow. Along with lower labor costs over the past eight years, businesses have also been benefiting from lower costs for borrowed capital. Correcting the manipulation of interest rates since 2008 will eliminate a factor that has been artificially helping fuel corporate profits.
Third, and perhaps the most important factor, is that instead of investing into research and development, new factories, or facilities, many companies have instead used their capital funds to purchase shares of their own outstanding stock. The Wall Street Journal reported on December 27, 2016 that from 2009 – 2016, S&P 500 companies have poured over $3.24 trillion into stock repurchases. THAT amount of internal buying has driven up stock prices significantly: much more than new profits, new products, or new processes.
These three factors and others have contributed to a recent era when the economy struggled but the stock market roared. A new president, a new era, and a hard to predict economic future may suggest that you should have a serious discussion with your trusted advisor about your investment strategies.
This is for education only. Before using this information in any way discuss it with a financial professional. There are many risks associated with stock trading. You may lose some or all of your financial investment. Securities offered through Dempsey Lord Smith, LLC Member FINRA/SIPC. Securities offered through Integrated Financial Planning Member FINRA/SIPC. Advisory services offered through Dempsey Lord Smith, LLC.