The S&P 500 has advanced to within a whisker of 1,600, a level that was a lodestone for many years as investors stared up from the 666 level seen at the lows of 2009, the 1,000 level, the 1,200 level, and so on. It’s like a journey to a height that has been promised for years — and now that it’s finally within touching distance, it’s very exciting and humbling at the same time.
You would normally think that the U.S. and global economies would have to be absolutely buzzing to achieve this milestone. But, of course, you would be wrong. The eurozone is largely in a recession that shows few signs of improving, Japan is in recession, China’s growth is slower than expected, and South America is not surging to the levels once expected. Here in the United States, 4% GDP growth used to be considered normal and now is considered an impossible dream as growth stutters around the 1.5% to 2.5% mark.
Here are the main reasons that stocks are up despite the anemic growth rates: Companies have used the slack employment environment to keep labor rates low; the weak economic environment has also kept commodity prices down; and central banks have kept the cost of money low. So the three biggest expenses that companies have — workers, raw materials and interest rates — are at ebb tide. That has allowed earnings per share to rise at surprising rates, and this has led to an increase in risk-taking among investors.
Additionally, stocks are always in competition with bonds for investors’ love and attention. Since government and investment-grade bonds are yielding so little, investors have been forced into stocks by default. And furthermore, the low cost of issuing bonds has led even cash-rich companies like Apple (NASDAQ:AAPL) to issue debt practically for free and use the proceeds to buy back stock. That has reduced the number of shares outstanding, further increasing companies’ paper value.
There is no natural reason for any of these five trends to abate anytime soon. I still believe a correction is ahead, but timing it will be extremely difficult to predict.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage, which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
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