Five reasons for optimism

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:

  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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


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