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 during
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.
