There’s an old saying about Wall Street climbing a wall of worry. And right now there are plenty of worries — from sequestration to Cyprus to a China slowdown.
The stock market’s race to all-time highs has impressed and surprised many on Wall Street. But even bulls are wondering whether the rally has run its course.
But these problems keep the market rally honest. Furthermore, there is a host of encouraging signs for investors who can look beyond the negative headlines.
Below are 10 reasons the market could move even higher. Feel free to share your own observations in the comments section, and for balance, please read a companion piece: “10 Signs Your Stocks Are About to Tumble.”
Now put on your rally cap:
#1: Banks Are Back
Fat-cat financials are unpopular, I know, but on the whole it’s good that major banks are doing better. Healthier bank balance sheets are the result of increased lending, lower loss reserves and higher capital cushions.
Moreover, systemic risk from the mortgage meltdown has mostly been wound down, as has the overhang of mortgage-related lawsuits. A hard fact about capitalism is that access to capital is key — and more loans to small businesses as well as increased mortgage lending are signs of a healthy economy.
#2: You Can’t Fight the Fed
Forget that blip in the Federal Reserve meeting minutes about possibly tightening policy ahead of schedule. The bottom line is that the Fed has its foot to the floor with its zero-interest-rate policy and quantitative easing, and Bernanke & Co. are decidedly in favor of stocks and against interest-bearing assets.
True, some risk-averse Americans continue to sit this rally out and others have made decent money in Treasuries. But broadly, central bank policies favor stocks vs. the alternatives — and as this rally since 2009 has shown, most investors would be wise to go with the flow rather than fight the Fed while loose monetary policy reigns.
#3: Jobs and Spending
The 7.7% unemployment rate the U.S. printed for February was the lowest in four years, and that trend of slow and steady improvement looks to be continuing based on the latest look at growing job openings and declining layoffs. We also just learned about strong retail sales from February that show Americans are spending despite the payroll tax hike, sequestration and other supposed risks to consumer confidence.
#4: No Recession Risk
The St. Louis Federal Reserve actually has a “recession probabilities” chart based on a combination of non-farm payrolls, industrial production, real personal income and manufacturing/trade sales. The measure is close to zero right now. Also, a separate indicator from Cullen Roche’s Orcam Investment Research shows no near-term risk of a downturn based on his firm’s proprietary recession index.
Many pointed out in 2011 and early 2012 that there could be no sustainable recovery without the participation of housing. Well, now we have participation in a big way, with housing construction as well as home values rising decisively. Looking forward, optimistic researchers such as Nomura are projecting housing starts to grow by as much as 30% year-over-year in 2013. That’s good for jobs, as well as the “wealth effect” in American households.
Industrial production in 2012’s fourth quarter was much stronger than reported. Plus, durable goods orders jumped in January by the highest amount in more than a year, thanks to strong demand for machinery and manufactured metal products. U.S. manufacturing PMI has remained in growth mode since late 2009, and recent numbers for February saw output rise at the fastest rate since March 2012.
While most focus on housing, the auto industry historically also has been an important part of any climb up from recession and into recovery. Say what you want about “Government Motors” and the bailouts, but Chrysler and General Motors (NYSE:GM) are stable — and though revenue isn’t back to mid-2000s peaks, GM did post a record profit just two years after declaring bankruptcy. Furthermore, 2012 U.S. light-vehicle sales hit 14.5 million — the highest level since the Great Recession, and a sign that consumers are willing to spend again on bigger-ticket items. Continued growth is expected this year, with research and consulting firm Polk expecting auto sales to hit 15.3 million vehicles in 2013.
#8: Buybacks and Buyouts
There’s cash on the sidelines as it relates to individual investors, and there’s idle cash that businesses are sitting on. Private equity is flush with cash, and corporate cash on balance sheets is double the average level.
This has caused merger and acquisition spending to top $219 billion so far in 2013, compared with $85 billion in the same time frame last year. Clearly, businesses think good opportunities are out there — whether they be via buyouts or a record amount of stock repurchases.
#9: New High Is Not a Top
Recent data from Ned Davis Research reviewed the 13 highs for the S&P 500 since its 1950s debut. The data show that in the worst case, the S&P 500 tacked on another 2.3% over 132 days before peaking. In the best case, the bulls marched ahead for around 7.5 more years — 2,711 days, to be exact — and added another 221.6%. The median since 1954 is 417 days and 18% upside. Granted, this sample size is small, but it’s noteworthy.
#10: Stocks Can Rise Even If the Economy Stalls
This final point is key: Economic growth and stock market performance are not joined at the hip. The Dow doesn’t move in tandem with GDP. Sure, there is an economic element to stocks and corporate profitability. But a recent Bank of New York Mellon report cited in The Economist showed no hard link between dividends, earnings growth or capital appreciation in the stock market.
In fact, from 1972 to 2009, the nations with the highest GDP growth rate saw stock markets deliver smaller gains than those with the lowest GDP growth rate. So much for the idea that you must have a red-hot economy to support a red-hot stock market.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.