Sterling performance of the US Stock Market By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran
Posted by bobbysrinivasan on January 10, 2017
The Dow Jones industrial average is currently at 19870 and waiting to cross the magic 20000. The reason for its phenomenal achievement is the low interest rates prevailing in the US. The Fed funds rate is currently in the range 0.50 to 0.75%. The recent nudging of interest rate by Janet Yellen has pushed the 10 year bond yield to 2.6% from a previous level of 1.8%. Inspite of the increase the market is marching forward. Share prices are determined by future profits of the underlying companies and the rate at which those profits are discounted back to the present. Also the quantum of liquidity supporting the market has increased many folds due to low interest rates. How did the confidence return back to the market? This is a conversation between a student and his Professor.
Student: Professor, with Trump’s victory everybody declared that the US Stock Market will drop significantly. What I notice is that the stock market is moving up steadily? What did change?
Professor: Stock market prices are determined by sentiments, earnings strength of currency opportunities in other countries. In the US case the sentiment has definitely changed. Trump’s promise to lower corporate taxes will improve corporate profits. He also expects to achieve a near 4% growth from the current 2 plus rate. This will increase the GDP per capita wealth of US citizen.
Student: What will be the reason for this expected growth?
Professor: Trump has said repeatedly that he will lower the corporate taxes and also spend 1 trillion US dollars in infrastructure development. These promises have encouraged people to invest in the stock market. Lower taxes will definitely push up corporate earnings.
Student: If the US Stock Market is climbing new heights, why is the Indian Stock Market is stagnant?
Professor: Sensex after touching 30000 is currently trading around 26000. Modi’s demonetization and his recent announcement that long term capital gain should be taxed have scared the investors. You see the Indian Stock Market is heavily funded by the Foreign Institutional Investor. As per the estimate Indian funds abroad legally or illegally is routed through Mauritius to benefit from the Indian Stock Market performance. There is a fear among them that Modi may introduce capital control and may force the participatory note traders to reveal the names of investors. This he may do to check for black money. Fearing that this could happen FIIs are selling in large quantities and are currently repatriating their equity and profits. According to Times of India of 26 Dec. 2016 nearly 8 billion dollars have moved out of India in the last two weeks. Nobody knows what will happen. The market capitalisation of FII shareholdings is around $ 300 billion dollars. Modi has promised to bring back the black money slashed outside India. This may be one way of bringing the money back. As far as US is concerned many people feel that the Dow Jones index is overbought and a correction is on the way. But for the time being it is great news for an American investor. He never expected this bonanza to happen.