The financial news media are quick to report negative economic developments and to predict trouble ahead. It’s hard to go a day without seeing bad news and dark predictions. We thought a recent article in Barron’s financial weekly magazine was a good corrective to the perpetual gloom. It offered five reasons why the end of the long bull market in stocks is not imminent:
- Stock dividend yields are still generous. In fact, an average dividend yield of 3.2% is higher than the dividend yield before the 2008 stock market crash, even though competing interest rates are lower.
- There is no bubble in housing prices. The median house price in 2016 dollars is still well below the peak in 2007, before the crash.
- Oil prices are contained. Barron’s notes that a recession is generally preceded by a spike in oil prices. Instead, oil prices have fallen sharply over the last two years.
- The yield curve is normal. The yield curve refers to the slope on a chart that shows the progression of interest rates from the short term up to 30-year maturities. In a normal yield curve, short-term rates are lower than long-term rates. That’s how the yield curve looks today. Recessions are often preceded by a reversal in the curve, where short-term rates are higher than long-term rates.
- Sales of new homes are on the upswing. The latest data show that sales continue to rise to new highs since the 2008 crash.
Richard Schroeder, CFP®
Aug. 3, 2016