The Market in 2012: Stocks Up, Economy Sideways
Stocks in the U.S. are headed for their fourth straight year of gains, and two of the main equity measures are showing double-digit advances since the start of 2012. Not bad considering the economy didn't do a lot to warrant that kind of stellar performance.
Clearly, it's not entirely bad on the economic front. Signs of improvement are there, but the effects of the 2008 downturn are still lingering, in some areas more than others. What happened this year is further evidence that stocks don't need a humming economy to grow nicely. Through Dec. 18, the Dow Jones Industrial Average was up 7.7%, and the S&P 500 had climbed 13.3%. The Nasdaq Composite was the best of all, rising 21%.
If you're into the idea that stocks are valued today based on what's expected to happen tomorrow, then you could make a broad comment that traders believe the U.S. economy will improve, and therefore it's time to get shares now, even this far into the extended rally. There's also the greater fool theory. That essentially means we'll keep seeing the market churn higher as long as a person is willing to pay more than you did for a given stock, probably for no good reason other than they hope to do down the road to someone else what you did to them.
Weren't never-ending worries about Europe, expanding U.S. debt, the election or the "fiscal cliff" -- or so-so-data domestically -- supposed to prevent this from continuing? Well, it's not always rational in the market. Sometimes it makes sense, but just as often it doesn't, and trying to pin down the motives of professional traders and attribute the market's behavior to "worries about x" often doesn't satisfy or enlighten.
No Straight Lines
Any number of data series can be chosen to make a point as to how terrible or wonderful things are, but we've picked a handful to give you a general sense of how the U.S. economy made out in 2012. In short, it's a lot of up and down. Inconsistency made a regular appearance this year, and in cases where the trend does seem to be higher, it's fairly muted. Either way, stocks haven't cared. Let's look at a few numbers from one of the most important releases there is, the monthly jobs report.
Source: Bureau of Labor Statistics. U-6 includes total unemployed, plus all marginally attached workers and those employed part time for economic reasons. Jobs created in thousands.
A little better recently, yes, but hardly awe-inspiring. Economists would tell you the number of jobs created each month has to get higher in order to declare this a healthy labor market.
Move on to another key sector of the economy: Housing. Existing-home sales and housing starts, taking an optimist's view, have been a bit stronger lately. But again, in total, the year has been back and forth.
Source: Census Bureau, National Association of Realtors. Housing starts is seasonally adjusted annual rate, in thousands. Existing-home sales is seasonally adjusted annual rate, in millions.
That brings us to the last two illustrations. Retail sales each month tell us what people are spending on all manner of merchandise, from clothes to food to books. The gross domestic product is the value of all the goods and services produced in the economy. Because GDP is a quarterly number, you'll see three years of data for comparison.
The former might be stabilizing at a slightly higher range, while the latter doesn't inspire tremendous confidence that the economy's taking off -- the best showing of the year is still well under a 3% growth pace.
Source: Census Bureau, Bureau of Economic Analysis. Retail sales in $ millions. GDP presented as seasonally adjusted annual rates.
Competition Could Be Better
Taken together, these data don't clear up why shares in the U.S. would turn in a showing like they have the past 11 months and two weeks. A few theories, though, can help us understand what's behind it, and frankly, it's tempting to apply the "best house in a bad neighborhood" approach. Corporate profits have been solid, though revenue not as much, so that only offers a partial explanation to the upward move.
A more palatable notion is that if you want return, stocks in America are faring better than a lot of other things. Low-yielding fixed-income securities immediately come to mind. The 30-year Treasury was recently at 2.98%, up from 2.90% at the end of 2011. The 10-year yield is at 1.80% vs. 1.91% when the year started. Certainly not blockbuster paydays. For those who want appreciation from Treasury prices, that's also not worked out very well in 2012. Meanwhile, gold has been ragged, and it now sits about $100 an ounce above where it was at the end of last December, some 6% higher. Oil futures are down 10% from near $99 a barrel. Against this crowd, stocks look pretty good.
The U.S. also continues to be viewed as safer than many alternate options -- Europe and China have been too risky for some investors for a while. Then, of course, there's the Federal Reserve, which has been supplying hundreds of billions of dollars to banks via bond market interventions that it hopes will spur investment and growth. The U.S. central bank has been a powerful player since its first quantitative easing in late 2008, and this year again it showed its willingness to buy debt securities to keep interest rates depressed and get the housing market cranking again. It's not going to stop anytime soon, saying that it expects less-than-impressive economic conditions to persist.
What this means is the data, as long as they aren't horrific, may not need to significantly strengthen in the year ahead in order for stocks to keep heading up. The economy hasn't seen roaring growth in a while, and it might not again soon. It also might not matter to the equity market.
