According to an article in the May 11 issue of the Wall Street journal, worldwide stock markets are soaring. But are these gains sustainable?
Veteran financial advisor John Dubots weighs in on this issue on his financial services blog, www.johndubots.com. Dubots says that in his view it’s not likely, for a number of reasons.
Among the reasons that the stock market rally may be short-lived:
Falling food and energy prices have pushed down global inflation, a trend which is likely to continue, according to another recent article in the Wall Street Journal. Falling prices are another way of saying "deflation". And central banks are very wary of deflation, according to Dubots.
Deflation causes consumers to cling to their money, rather than spending it. This slows down economic growth and hinders corporate profits. When corporate profits are down, investers are spooked and are less likely to want to invest.
The talk of deflation has caused central banks around the world to talk about “quantitative easing” as a possible solution - which is a central banking term for printing more money, with the idea that if enough money is printed, it will somehow encourage spending. So far, Dubots notes, this has not happened.
If corporate profits don’t rebound, in Dubots’ view, then stock prices are overvalued. In a recent newsletter, Gary Shilling stated that he predicted an earnings forecast of $40 per share for S & P 500 companies. Dubots believes that the earnings need to be more in the area of $60 per share for the stocks to be properly valued - a scenario which does not seem likely to occur.
For more details and to read more about John Dubots’ views on the market, please visit www.johndubots.com.
Investing in market related securities involves a risk of principal loss. Prior to making any investment decision, the services of an appropriate professional should be sought as investment related recommendations are dependent upon the personal financial situation of each individual investor.
Dubots is president of John P. Dubots Capital Management, LLC. He is a retirement income and estate planning specialist who has been serving affluent clients in Southern California since 1991.
