After having registered an exceptional gain of 77% between December 31, 2011 and December 31, 2014, the U.S stocks appear to be taking a pause.
During 2015 and up till April 8, 2016, the stocks flattened. After a long period of recession, when the American economy finally returned to its normal valuation level, people responded by investing in the stock market. This caused the stock markets to expand accordingly and create a record three-year Bull Run.
During this period, the Standard & Poors price-to-earnings multiple increased from an underestimated 12 to an overestimated 18.2. The American economy has performed well in the last few years and this is reflected in the share prices. Currently, the U.S stocks are valued at 17.4 times their trailing 12-month earnings.
James Summer, the Global Co-Chief Operating Officer of Equities at Acom Alliance says, "S&P registered a decline in earnings during 2015. The earnings exhibited a negative slope as the energy and material sectors collapsed
2015. These two sectors are expected to perform very well in 2016 and this will
cause the earnings to rise again."
Since 1900 only 3 out of 23 bull markets have managed to sustain themselves for more than six years. The longevity of a bull market is hampered by the possibility of a bear market. As of March 31, 2016 the kind of economic conditions that usually prevail during a bear market were absent. These economic conditions include signs like slowed economic growth, over estimation of stock markets and restrictive fed policy -- none of which are visible in the current scenario. If records are any indication, it is unlikely that a bear market will prevail over the U.S. economy.
U.S economic data releases have been positive for months now. The ISM Index bounced back in March this year reaching 51.8% on April 1 2016. The new orders, which is an intrinsic and forward-looking component of the ISM Manufacturing index, increased to 58.3% in March from a previous 51.5% in February. The increase in new orders is a positive sign as it means that in the weeks to come, manufacturing activity will likely register growth.
Though most economists keep their eye on the ISM manufacturing index, the non-manufacturing Purchasing Managers’ Index (PMI), is a far stronger indicator of the strength of an economy. The PMI is even more important in the U.S as only 10% of the American people are currently involved in the manufacturing industry. The remaining 90% earn their living from non-manufacturing jobs.
The non-manufacturing PMI has been gaining consistently. It was 54.5% in March 2016. This figure is a point higher than what it was in February 2016. A non-manufacturing PMI of 54.5 percent is a strong number that shows that the U.S economy is doing well.
Since the manufacturing PMI index has also been registering constant gains, it is clear that the American economy has little to worry about in the weeks to come.