Dow 15,000: Why Stocks Keep Hitting New Records
Sometimes on Wall Street, the thing everybody expects to happen is the one thing that doesn't. So with many analysts predicting a stock-market correction, perhaps it's fitting that the Dow Jones Industrial Average keeps hitting new records.
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A better-than-expected jobs report for April was all it took to push the Dow to its latest peak. The Dow briefly eclipsed 15,000 Friday for the first time , while closing at 14,973, a new high. The unemployment rate is still elevated, at 7.5 percent, and employers created a modest 165,000 jobs in April. But economists had been expecting fewer new jobs, so investors interpreted the report as a sign of strength in the economy.
Some analysts still believe the market is getting ahead of the real economy, which could occasion a late-spring or early-summer pullback. But for now, investors seem emboldened by three factors:
1. Austerity measures in Washington don't seem to be harming the economy. President Barack Obama predicted a dire outcome if spending cuts went into effect as scheduled on March 1. But so far there's little sign that the "sequester," as it's known, has persuaded consumers to stop spending or businesses to stop hiring.
"There is no evidence--yet--of a sequester-induced slowdown in hiring," Nariman Behravesh, chief economist at IHS Global Insight, wrote in an analysis. "The April number provides a good starting point for the second quarter."
2. Investors finally seem eager to get into stocks. For most of the past five years, investors have flocked to supersafe assets such as Treasury bonds and even bank accounts--even if record-low interest rates mean they're losing money after inflation. Financial advisers are finally starting to convince them that stocks are a better bet than assets with puny returns. "Retail investors have been overinvested in bonds and underinvested in stock for a while," says Art Steinmetz, chief investment officer for Oppenheimer Funds. "Stocks aren't expensive. If anything, they're fantastically cheap relative to bonds."
Even if they're feeling more adventurous, however, many investors are buying "defensive" stocks, such as consumer staples companies, that are likely to hold up well if there's a downturn. That indicates many investors are still trying to play it safe.
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3. The economy is still weak enough to keep the Fed on the case. The job numbers and other indicators still show considerable weakness in the economy, which is actually good news for stock owners because it suggests the Federal Reserve will continue its easy-money policies well into next year. Those policies have deliberately inflated stock values and boosted corporate earnings, in order to embolden companies, which of course is good for Wall Street. "It's the best of all worlds," writes economist Joel Naroff. "Growing earnings and lots of liquidity. If only that meant more jobs, not just higher equity prices." For now however, higher equity prices is a heckuva lot better than nothing.
Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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