Five Reasons For Market Strength

9/8/2014


The S&P 500 Index has set record highs 32 times so far this year on its way to an 8% gain. Could it melt up in the final months like it did last year as investors chase performance? We consider five indicators, many of them interconnected, to help gauge the state of the stock market.

Economic growth

Last month, the U.S. Commerce Department upwardly revised real gross domestic product (GDP) growth to 4.2% for the June quarter, ahead of the prior 4.0% estimate and the Blue Chip Economic Indicators consensus of 3.9%. Blue Chip projects GDP to advance 2.9% in the September quarter, followed by 3.0% growth in both the December quarter and full-year 2015.

Interest rates

Anticipation that the Federal Reserve will raise interest rates could rattle the stock market, at least temporarily. Central bankers have held short-term interest rates near zero since December 2008 and seem unlikely to raise them until 2015. The Fed expects the federal funds rate to rise to 1.2% by the end of next year and 2.5% by the end of 2016.

Inflation

Inflation plays a major role in the Fed's decision on interest rates. One gauge of inflation, the core Consumer Price Index, which excludes energy and food costs, has not crossed above the Federal Reserve's target inflation rate of 2.0% in the past two years. The Fed tracks multiple price indexes but tends to emphasize the inflation rate of personal-consumption expenditures over the better-known CPI.

Labor

The U.S. unemployment rate, currently 6.2%, has declined steadily from its October 2009 peak of 10.0%. In June, the Fed said unemployment could dip as low as 6.0% by the end of the year and reach about 5.5% in 2015 — still well above the low of 4.4% experienced during the last expansionary period.

The labor force has also expanded in six of the past seven months. Importantly, the quality of new jobs has improved, with the lowest-paying industries contributing a smaller percentage of job growth.

Consumer sentiment

American consumers are the most upbeat in nearly seven years, according to a survey taken by the Conference Board. More people view jobs as plentiful and are optimistic that the labor market will improve. Personal income has risen every month in 2014, and consumers may also be feeling slightly wealthier, considering that home-price appreciation is gaining momentum. Existing-home sales have risen in four straight months, though the pace of new-home sales remains unsteady.

Conclusion

None of these factors alone — and indeed, not even all of them together — can promise a strong stock market. But the U.S. economic picture is getting brighter, a trend that should help sales and profits for thousands of publicly traded companies.


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