Wall Street was recently abuzz with news that the Dow Jones Industrial Average climbed to its highest levels ever.
Turns out that, so far, the market advance is not a fluke. It continued to hover around the historic high and closed out last week at 14,490.
The previous closing record for the market was set in October 2007, when the market topped out at 14,164. Shortly after mid-fall in 2007, the housing crash came home to roost and then the financial abyss commonly known as the “financial meltdown” took hold, crushing the Dow to 6,547 by March 2009.
Since that time we have had a long haul back to the 2007 high. Not only has the Dow reached a new record but the Standard & Poor’s 500 is not far behind, within a short distance of its own record of 1,565 set in 2007.
Why is the market doing so well these days?
In general, the market advances for two reasons: strong corporate earnings and low interest rates. We have had the latter for some time, but not so much the former.
Over the past couple of quarters, the former has turned around and good earnings abound in some companies.
While investors react to good news, they stay positive only as long as the news continues to be positive.
The second reason is the continued good news out of the Federal Reserve. They have kept rates so low that money is a bargain to corporations so they can borrow and invest in their future.
Again, for investors, it’s not “what have you done for me today?” It’s “what are you going to do for me tomorrow?”
Stocks are bought based on future earnings expectations and the more that companies invest, the greater the positive outlook for expansion and profits.
Another plus to the Fed’s move is the rebirth of the housing market. It’s on a real upswing.
Another mild positive is the improvement in the global economy and the U.S. economy. Europe appears to be on the mend and on other continents both South America and Asia are improving.
Keep in mind that most of the players in the Dow and S&P 500 derive a good chunk of their profits from overseas activities.
We all know that the U.S. economic recovery had been spotty at best and even in the good spots the recovery has hardly been anything to write home about.
Nevertheless, corporations have pulled back in this economy, spending only what they need to. They are now seeing the fruits of their prudence and are getting profits and revenues from around the world.
Of course, all the cutbacks in corporate America back in 2009 and earlier have helped bottom lines.
If home sales are back on the rise and car sales are also up, it would seem our economy isn’t too badly off.
That being said, we are still a long way from being completely nursed back to the picture of economic health. House prices are still about 25 percent below their peak. So that is still having a negative impact on people’s financial households.
All in all, it’s important to remember that the stock market is a leading economic indicator. And the stock market loves low interest rates — especially prolonged periods of low interest rates.
And the stock market also loves good corporate earnings. As a leading indicator, future projections carry a lot of weight on Wall Street.
How long will the party last? Tough to say. An accommodating Fed plus good corporate earnings equal a rising stock market. How long will both last? Right now, Wall Street appears to be saying “awhile.”
Please remember that stocks should only be a part of your entire investment portfolio no matter where the Dow is. As we have all learned, what goes up can go down.
Note: In my last column, I wrote that Medicare premiums are directly linked to your adjusted gross income. I said that when your income rises, the premiums not only rise but the increase is permanent. A loyal reader called me about this and I have since found out that despite my best efforts to check while writing the column, Medicare premiums are adjusted annually. I wish to thank this reader for taking the time to get in touch with me and point out the error. My apologies to all.
Karen Paul is a financial services consultant in Burlington.
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