The Case for Continued Growth in the 2013 Stock Market

2013-stock-marketWe’re seeing record high levels in stock indexes this year, but it’s leaving analysts with mixed feelings about whether or not this is a sign of real growth, or just another bull run caused by artificial macro-conditions. While there remains quite a bit of confusion in today’s markets, we can take a moment to break down the bull-side justification for how it is that this market has developed, and see if there is reason to believe that this is the beginning of a something real. Specifically, by looking at the components of what is actually driving today’s equity growth, we can hopefully discover a trend for real opportunities going forward.

The biggest thing that an investor can hope for in an investment opportunity is profitability. If a company is increasing its profitability, it is increasing its ability to pay back investors through distributions, and therefore increasing its investment appeal. Currently, we are seeing companies present increasingly appealing profit margins, putting them at all time highs in the S&P 500. Even though these margins tend to be cyclical in nature, they represent a favorable trend today in the way that they present the ability of management teams to create returns in ugly economic conditions.

However, as we dig deeper into these metrics, we can start to see that there is a discrepancy in these numbers. Specifically, we can see how it is that these overall profit margins are the result of highly favorable international profit margins out-weighing poor domestic profitability metrics. While this still demonstrates a favorable trend, it is concerning in the way that it demonstrates how companies must increase their exposure to foreign markets, and are losing their already established consumer bases. As such, the first aspect for us to evaluate in looking at the long-term feasibility of sustained growth is a question of whether or not companies can maintain their growth in international markets, at a rate which exceeds their reduced growth in domestic ones.

After looking at the internal company aspects that are driving market growth, we can start to evaluate how it is that external factors could also be driving this bull market into the future. Specifically, we want to accomplish this by looking at how it is that the market trends are evolving from a timing standpoint. On the one hand, there continues to be a discussion as to whether or not the extremely low fixed-income yields present in today’s markets are forcing investors into equity markets to meet their return objectives. Combined with Price/Earnings valuation multiples that are representing huge discounts in equity positions, there is certainly proof of motive for a pending asset-rotation.

From there, we can look at how it is that the next generation of investors are starting to enter their prime earning years, and therefore their prime investing years. As they enter their 30-40s, it is reasonable to assume that an increase in equity liquidity will result from the new funds coming into the market, looking to establish retirement positions for this demographic. Combined with the above metrics demonstrating a favorable investment environment, these external factors might very well be enough to justify the continued growth of equity markets into the short-medium term as a tangible trend, rather than a hiccup to the upside.

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