By Travis Hoium –
The year 2013 has been another great one for the stock market. The Dow Jones Industrial Average (DJINDICES: ^DJI ) is up 22.8% for the year, and it appears that nothing can upend the market’s momentum. Sequestration hasn’t made a dent, the government shutdown was brushed off, and even continued weakness in Europe hasn’t affected U.S. stocks.
You can see below that, not only has the Dow Jones Industrial Average gained a significant amount this year, but some of the most diverse and economically dependent companies have led the market. 3M (NYSE: MMM ) has exposure around the world, Microsoft (NASDAQ:MSFT ) is a leader in all parts of tech, and Boeing (NYSE: BA ) is dependent on businesses and consumers flying to increase profits. Yet, all three companies are up despite a pretty weak economic recovery.
So, why is the stock market doing so well if unemployment is still 7.3%, and it doesn’t look like the recovery has reached all parts of the economy? Let’s take a look at what investors see.
The economy is improving
Believe it or not, the economy is getting better. Since the beginning of the year, the number of layoffs are down, the unemployment rate is down, and GDP is up.
These statistics may not be as good as we want, but they’re improving, and that will help drive profits.
Earnings are up
Long-term, what drives stock prices is earnings. On that front, we’re doing quite well. Let’s take a look at those same three companies, and see how earnings have trended over the past three years.
You can see below that there are some dips and dives, especially for Microsoft, which wrote down $6.2 billion in 2012 because of a botched acquisition; but, generally, the trends are higher.
The good news here is that there’s still fuel left to drive profits higher. A total of 7.3% of Americans are still unemployed and, as they get jobs, there’s more money flowing through the economy.
There’s also $1.48 trillion of cash just sitting in the bank accounts of U.S. companies. When they see significant economic growth, they’ll put that money to work, giving another boost to the economy.
The economic recovery may not be as fast as some had expected, but it’s happening slowly, and when it picks up steam, there will be room for profits to grow even more.
Flow of easy money
The final reason stocks are up significantly this year is the flow of easy money from the Federal Reserve. Not only are short-term interest rates near 0%, but the Fed is buying long-term bonds with an $85 billion per-month plan intended to keep interest rates low.
This pushes borrowing rates for companies down, and also pushes investors into stocks and away from low-yield bonds. The money flow alone is enough to push markets higher.
Foolish bottom line
It may not seem like a year when the market should be up as much as it is, but there are a variety of factors pushing stocks higher. The crazy thing about the stock market is that, short term, it may not make a lot of sense at all. Next year, we could see the economy boom, and stocks fall flat.
That’s why we tell investors to stick around for the long haul. There will be bumps along the road, but you won’t miss out on a booming market like we have had this year.