Are you worried that the stock market won't enjoy further gains because major indices have risen to new records recently?
You might benefit from some free trading education on this particular subject. Don't worry. The market for U.S. equities may have more increases left to enjoy. There are a few reasons why these stocks could potentially continue to appreciate, even after hitting all-new highs.
First of all, quantitative easing is a factor that has been repeatedly cited in the media as having a substantial impact on global asset values. Many market experts have asserted that the price of these securities have been pushed to artificially high levels because of the record stimulus.
In addition, there are concerns that once the bond purchases are no longer being made, this change in policy could cause substantial declines in various asset classes. The individuals who fear such an event may have good reason to do so, as many assets plunged sharply in late June shortly after Federal Reserve Chairman Ben Bernanke stated that QE could start being tapered this year, according to International Business Times.
The day after he told members of the media that these bond purchases could be lowered in their pace starting in 2013, the Dow Jones Industrial Average plummeted 354 points, the media outlet reported. Other asset classes suffered similar declines, as the price of gold closed almost 7 percent lower and the 10-year Treasury yields surged to their highest in two years.
Crucial role of U.S. economy
The statements made by Bernanke have become more conservative since that time, as the testimony he provided before Congress in July helped to alleviate the concerns of those who are worried about the impact that tapering QE will have on assets, according to Bloomberg.
The Fed chief emphasized that the central bank had no certainty in terms of future asset purchases, as the pace of these transactions could be increased, the media outlet reported.
In addition, Bernanke noted that any action to either bolster or decrease this bond buying would depend largely on U.S. economic data. He specifically cited the jobs market and inflation as being crucial factors.
It is important to note that the strength of the U.S. economy has been cited repeatedly as having a significant impact on asset prices. In order for bond purchases to be reduced and then eliminated, key indicators of the health of this economy must be at certain levels.
If the nation's financial standing improves to the point where the Federal Reserve believes that such stimulus is no longer needed, then the strength of this particular business climate might be enough in and of itself to push stocks to new highs.
Valuations could rise significantly
Another key factor that could be cited to support the belief that U.S. stocks could enjoy further gains is the valuations of the S&P 500 Index. BofA Merrill Lynch equity strategist Savita Subramanian observed that the benchmark group of stocks is not overvalued, at least according to the majority of measures, Business Insider reported.
In a note to clients, the equity strategist listed 15 metrics that are frequently harnessed to assess the S&P 500 Index, according to the news source.
"The majority indicate that the market is still trading below or in-line with historical norms, suggesting that the rally has chiefly been driven by a recovery in multiples from very depressed levels," Subramanian wrote, the media outlet reported.
The equity strategist is not alone in observing that the market is not overvalued. The S&P 500 Index is trading at 16.3 times reported earnings, and data compiled by Bloomberg revealed that this figure is 16 percent less than the average multiple that has existed from 1998 to now.
As a result of this low valuation, the S&P 500 could easily rise to new highs. The Dow might enjoy the same appreciation.