What Goes Up, Must Come Down? Not Necessarily.

I’m an early riser and I like to go to the gym before my family stirs from their beds.

Recently, as I drove home afterward a workout, I began to think about the business day ahead. I had tuned in to the financial news on satellite radio when I heard an advertisement.

 

The ad simply asked, “ Do you think the stock markets can continue to go up forever ?” The advertisement was designed to make you believe that at some point the markets had to go down; but as I heard it, I kept thinking they were wrong.

 

Not only can the stock markets continue to grow indefinitely , but they need to. Of course, in the short-term it is anybody’s guess. No one knows what is going to happen today. No one knows what’s going to happen over the next couple weeks or even months. But given a long enough timeframe we have to believe that the stock market will grow.

 

 

It’s simple economics. It would be catastrophic if we don’t have inflation in the economy. In the absence of inflation, there is no incentive for anyone to make any financial moves today. In the worst case, where there is negative inflation (deflation), there’s actually an incentive to postpone buying new goods and services which is devastating to the financial health of the economy. Just ask Japan.

 

Today the stock market is reaching new highs, but readers of our quarterly free economic updates know that we continually to look at the ratios and other valuation factors. We do not believe today’s stock markets are overpriced, nor are today’s markets undervalued. We believe that the stock markets are currently fairly priced.

 

Do I believe that the stock market in the long-term will increase forever? Yes I do, and I believe you should too.