While macro economic analysis issues such as reduced interest rates and a declining U.S. dollar have positive effects on the stock market, there is a direct correlation in the stock market to its trading direction and the value of the stocks that trade in the market.

Here are three reasons why stocks will continue to advance in the immediate term.

1. Profit margins of the S&P 500 non-financial companies are expected to rise 8.9% in 2011, their highest level in 18 years (Bloomberg survey, 3/14/11).Stocks rise as their profits rise. With interest rates at record lows, real estate prices still trying to find a bottom, bond buyers weary of higher interest rates in 2011, and gold still not accepted by general investors as an investment, stocks remain the only viable alternative for investors. As public companies continue to increase their profits, their stock prices will rise.
2. The S&P 500 companies are sitting on their biggest hoard of cash ever—close to $1.0 trillion.Cash insulates companies from economic downturns, while providing them with money to make acquisitions and to buy back their own stock—both exercises resulting in less stock in the marketplace. Less supply of stock, even if demand remains unchanged, results in the stock market moving higher.
3. Dividends are set to rise as corporate profits spur bigger payouts to investors.Rising dividends make stocks more attractive to investors. The highest profit margins in 18 years will see corporate profits returned to investors in the form of dividends.

In respect to interest rates, a 100-basis-point rise in long-term rates will have a major negative impact on the bond market. For the cash-rich S&P 500 companies, a 100-basis-point rise in interest rates will not have much of an impact on earnings. In fact, I believe the stock market has already discounted a full percentage point increase in interest rates.

Michael’s Personal Notes:

For my gold bug readers, and those investors investing in gold, here’s a short recent history on gold bullion:

1900 – The U.S. adopts the gold standard via the passage of the Gold Standard Act.

1913 – The U.S. Federal Reserve requires all money issued by the Reserve to be 40% backed by gold.

1933 – Start of the Depression; Roosevelt prohibits private holdings of gold bullion and gold coins.

1944 – Bretton Wood agreement established. U.S. dollar needs to maintain a gold coverage of $35.00 to on ounce of gold.

1971-1973 – The U.S. devalues the dollar and raises the official selling price of gold to $42.22 per ounce. Currencies start to float freely without a specific tie to gold.

1975 – Americans allowed to own gold coins and bullion for first time since 1933.

1976-1979 – The International Monetary Fund does away with the official price of gold. Governments allowed to trade freely in gold.

1980 – Gold reaches $875.00 per ounce.

1999 – Euro is introduced as a currency; 15% backed by gold.

2001 – Central banks return to buying gold for the first time in 20 years.

2015-2020 – World inflation and a collapse in the value of the U.S. dollar over the past decade causes gold to trade between $2,500 and $3,000 an ounce. (This one’s a Michael Lombardi prediction.)

Going way back…

1091 B.C. – Gold becomes a form of money in China in the form of squares.

560 B.C. – First gold coins minted in Turkey.

58 B.C. – Julius Caesar’s conquests of other countries are enough to pay off Rome’s debt. How will the U.S., with the world’s biggest national debt, pay off its debt?

(Source, except for Michael’s prediction: The Ages of Gold, National Mining Association, World Gold Council, 2007.)

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 3.8% for 2011. My opinion is that, through thick and thin, we have been in a bear market since March 2009 has served me well, and I continue with that belief.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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