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Right now, good news is trumping bad news and if it holds up, this current market optimism could send stocks even higher.

With all the worries out there, why are stocks soaring?

Peter Switzer
15 July 2016

By Peter Switzer

The Yanks on Wall Street have done it again with new record highs for the Dow Jones and S&P 500 indexes, making it a five-day rally for US stocks. This hasn’t happened since March this year. But what gives?

A stock market has the history of being a forecaster of future reality. This surging stock market — and ours is up six days in a row! — has to be indicating that the economic and corporate profit future is a lot better than experts were thinking, especially earlier in the year when our stock market went as low as 4700 on the S&P/ASX 200 index.

In case you missed it, we’re now at 5411.6, with 5400 being an important psychological level for us to beat yesterday. So is it right to be optimistic?

Since early February when our stock market hit its lows, we’re up nearly 15% and as someone who kept telling people to have faith in stocks, this is a great outcome. But even still I ponder, what gives?

Let’s list the big worries out there, so here goes:

  • Brexit and what it means for the UK economy — the fifth biggest economy in the world — with the IMF tipping a recession there.
  • Brexit and could the EU see other breakaway countries?
  • The Italian banking system looks dodgy and vulnerable.
  • China continues to slow down and Dr. John Hewson, who actually is a pretty good economist, thinks the Chinese economy is worse than stats reveal.
  • The impact of Syrian migration on Europe.
  • The terrorism threats that are undermining the tourism sector for countries such as France.
  • The financial threat of a President Donald Trump. Add to that, the economic threat, given his promised policies on protectionism.
  • The bond market is telling us to be scared, very scared.

Yet markets head higher, so I repeat, what gives?

First, the Poms have a new PM and, overnight, the Bank of England has hinted strongly that interest rates will be cut next month and while the UK’s FTSE index was off 0.24%, the German and French markets were up over 1%. In very basic terms, the very worry of Brexit has central banks worldwide poised to make money easier to get. This powers stock markets higher because shares with their dividends return a lot more than term deposits or bonds.

Second, the market view is that the EU will have some threats of breakaway countries but they’ll manage it and muddle through.

Third, Brexit might have given Italian banks a bailout. Some of its biggest banks have seen their share prices tumble 50% this year alone but the fear of an EU bust up suggests that the Europeans will make life easier for Italy and its banks. In October, there is a referendum on constitutional reform but if the vote doesn’t go the right way, we could have an Itexit or a Spagexit on our hands and that would rock financial markets.

Fourth, China is always a worry, as pessimists predict a slower economy, but economists generally are relaxed that the economy is progressing towards a more services-oriented economy. And anyway, resource prices are on the rise, so China isn’t hurting global demand for commodities.

Fifth, Japan looks poised to spend more after PM Abe’s party had a landslide victory in the upper house elections over the weekend. The Japanese stock market is up over 8% this week alone!

Sixth, the US economy is stronger than expected, with 287,000 jobs showing up in June when 165,000 were expected.

Sixth, Brexit is delaying interest rate rises in the US and there are many market experts tipping no rate rise this year!

Seventh, company earnings could be poised to be better than expected in the US, with reporting season starting this week and the results of the likes of JP Morgan and Alcoa raising hopes that American companies might be on the up.

Seventh, the bookies still say Hillary Clinton will beat Donald Trump with Sportsbet having Hillary at $1.36 while Donald is $3.25.

And eighth, on the local front, we created 38,500 full-time jobs in June, our economy has been growing around 3% for six quarters and the experts are now suggesting our company reporting season, which starts in August, could be better than expected.

Right now, good news is trumping bad news and if it holds up, this current market optimism could send stocks even higher. Obviously, an Italian curve ball or a Trump victory could rattle stocks but at the moment I can’t see a compelling reason to doubt the current rally, apart from the fact that a sell off is overdue.

This is always on the cards, especially with US stock market indexes at all-time highs, but until I get totally scared of our economic and corporate outlooks here and around the world, I’d be a buyer on any significant dip in the market.

I argued exactly the same thing in February and the market is now 15% higher.

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