Thursday, October 14, 2010

Stock Market Run Up

The Lehmann Letter (SM)

The stock market has enjoyed a robust run up this fall. The chart reveals that the S&P 500 has gained about 50% from its recession lows. The chart also reveals that the S&P must gain another 25% to exceed the peaks enjoyed in 2000 and 2007. The stock market has fluctuated in a range over the past decade. What has driven the market thus far and will those forces be sufficient to drive it to new higher ground?

Chart 1.1 S&P 500

Click on image to enlarge)

Recessions shaded

Supply-side forces have prevailed to date. The financial panic is over and interest rates are at rock bottom. Inventory liquidation has concluded and firms have resumed production. Most important, profit margins have been exceptionally strong and grown to record highs. That has enabled total profits” full recovery.

But total profits continued growth depends on more than robust margins. Sales volume must expand rapidly as well (Profit margins X Sales volume = Total profits). This depends on strong demand growth throughout the economy, and achieving it won't be easy. All the indicators point to sluggish demand growth now and in the near future.

Can the S&P soon break through its previous highs and rise to over 1,600? It won't be easy with demand in its current weak condition.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

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