Day-to-day, stocks seem to flail around like lotto balls in a gravity-pick machine. Frenetic, directionless and wild. Over the long-term, however, stock prices are fueled by economic and earnings growth and behave rationally. Let’s examine the facts.
Unemployment is at a 50+ year low. Tech employment which comprises just under 4% of total U.S. jobs, is growing much faster than overall employment. This is good news for investors. Why? Because technological innovation increases worker productivity which then allows corporations to produce more goods per employee. And despite rising wages due to a scarcity of job seekers, improving productivity allows corporations to maintain profit margins and earnings growth – an important driver for stock prices.
Interest rates as measured by the1 -year Treasury have declined from almost 3.3% last fall to 2%. Lower interest rates can hurt savers but help spenders and boost the demand for housing. Low rates also make stocks more attractive. The legendary investor Bill Miller, in a recent interview with Barron’s, said that “stocks are ridiculously cheap” compared to bonds and cash. The market’s current price-to-earnings multiple of around 17x is above the historical average since WWII of 15x, but the average is distorted by periods of high-inflation, argues Miller. With low interest rates and low inflation, he would expect the multiple to be closer to 20x.