Most of the economic data we saw during the past three months shows that the U.S. economy continues to gain momentum. Improvements in the employment situation and housing fueled the market higher. We are also seeing improvements in consumer confidence numbers, which is an important factor in an improving economy as roughly two thirds of our GDP comes from consumer spending.
Many people are hesitant to invest in stocks when the market is at an all-time high like it is now. It is important to remember that there is not a ceiling on stock prices. The important number is not the level of the market but that level relative to market earnings. Corporate earnings for the S&P 500 companies are twice as high now as they were when the market was this high back in 2008. As long as earnings continue to grow, the stock market can continue to climb and not get "expensive."
As we have said many times we are not short term predictors of the stock market. When we look at fundamental measurements of the market, however, we are seeing lots of things that are good for the stock market. Interest rates are very low, more people are going back to work, the housing market is improving, debt levels are dropping, and the economy is improving.
All of these items point to a great environment for corporations to increase their earnings which, in turn, lead to higher stock prices. There is never a time when the market can't go down. However, massive market drops come when valuations are high or some extreme shock hits the markets. We think a large drop from these levels is unlikely.
There are, as always, things out there to be concerned about. Growing tensions in Korea and the continued economic uncertainty in Europe are two of the biggest. As history is our guide however, the market overcomes these problems over time and continues to reward investors.
About Wabash Capital
Wabash Capital is an employee-owned registered investment advisor based in Terre Haute, Indiana, providing investment advice and professional portfolio management to individuals, corporations, banks, trusts, retirement plans and endowments. To learn more about our business, please visit www.wabashcapital.com.