March 9, 2009: The S&P 500 (INDEXSP:.INX) loses 7 points, or 1%, to close at 676, the benchmark’s lowest close since September 1996. That day, the Dow Jones Industrial Average finishes at 6,547.
Wall Street’s run, which began during a time of massive government bailouts and continued through three separate rounds of “quantitative easing” by the Federal Reserve, is sometimes criticized as an artificially created bubble, a bubble that will pop as soon as zero-interest-rate policies disappear and the Fed stops printing money.
Well, after finishing a third round of quantitative easing in October 2014, the Fed’s not printing money anymore. And while interest rates are still near zero, most economists expect rates to rise sometime this year.
And guess what? The U.S. economy can stand on its own. In fact, it looks rather … robust.
Here are five reasons the stock market rally is far from over:
Reason #1 the Stock Market Rally Is Far From Over: The Labor Market is Recovering
When the stock market bottomed in March 2009, the unemployment rate stood at 8.7%. Just one year before it was 5.1%, or roughly what the Federal Reserve considered to be the natural rate of unemployment at the time.
After peaking at 10% in October 2009, the labor market has slowly but steadily been recovering. Last month it fell to 5.6%, an improvement of 1.1 percentage points from December 2013.
The 5.6% unemployment rate is the lowest on record since June 2008, and in 2014 the U.S. economy added nearly 3 million jobs, the most in a calendar year since the go-go days of 1999. And while the recovery-era labor market is often criticized for being far too competitive, employers are adding more jobs each day: U.S. job openings are currently at a 14-year high.
The fact of the matter is, the job market is healthier than it has been in years, and the fact that businesses are increasingly willing to hire shows the private sector’s confidence in continued economic growth.
Reason #2 the Stock Market Rally Is Far From Over: GDP Growth is Picking Up
As an investor, an improvement in the labor market is reassuring, but nothing quite proves the momentum of the economy like, well, economic growth itself. In the third quarter of 2014, the U.S. economy posted its strongest growth since 2003 as GDP rose at a 5% annualized clip.
Coupled with the second quarter of 2014, when GDP rose by 4.6%, no other six-month period in the last four years has had two consecutive quarters of 3.5% growth. While GDP growth is unlikely to grow at 5% again in the fourth quarter, America is starting to look like the global economic anchor once again.
Bob Doll of Nuveen Asset Management expects U.S. GDP growth to exceed that of emerging markets in 2015 for the first time since 1999.
Reason #3 the Stock Market Rally Is Far From Over: Low Oil Prices
While plunging oil prices dominated the headlines of financial media organizations in recent months, it seems like investors forgot why plunging oil prices is such a bad thing. Perhaps that’s because it’s not a bad thing — for the U.S. at least. Venezuela? That’s another can of worms.
Yes, it’s true that the U.S. shale oil boom will take a hit as energy prices suffer from supply gluts and slow demand. Denbury Resources Inc. (NYSE:DNR), Noble Energy, Inc. (NYSE:NBL), Continental Resources, Inc. (NYSE:CLR) Oasis Petroleum Inc. (NYSE:OAS) and countless other domestic producers have seen their stock prices hammered in the wake of the energy selloff.
But the energy sector’s loss is a net positive for other the U.S. as a whole, as fossil fuel cost savings are passed on directly or indirectly to every consumer and business that functions as a meaningful part of the economy. Despite global growth concerns, the World Bank just boosted its 2015 U.S. GDP growth forecast from 3% to 3.2%.
Citigroup Inc. (NYSE:C), back in October, also noted the positive effects of slumping oil prices, predicting that oil’s decline to $82 per barrel would add as much as $1.1 trillion to the global economy. One can only imagine what sub-$50 oil can do for growth.
Reason #4 the Stock Market Rally Is Far From Over: Low Interest Rates
One of the more compelling reasons for being bullish on the stock market today is the incredibly low interest rates that the Fed has maintained in an effort to stimulate growth.
Not only do low interest rates encourage borrowing and therefore entrepreneurship, innovation, risk-taking, development, and real estate purchases, but they also make bonds look extremely unattractive.
For any investor who wants a substantive return on their investment, buying stocks remains the best option. With the 10-year Treasury yield paying out less than 2% annually and 30-year bonds going for just over 2.4%, there’s little motivation for income investors to venture out further on the yield curve.
With commodity prices in the gutter as the U.S. dollar flexes its muscles, stocks offer the most attractive risk/reward of any asset class.
There are plenty of quality dividend stocks to buy for income investors to hunt down, and with the easy money environment giving companies attractive ways to change their capital allocation, corporate America is eagerly buying back shares, sending stock prices higher.
Through September, the five U.S.-listed companies with the largest volume of share repurchases — Apple Inc. (NASDAQ:AAPL), International Business Machines Corp. (NYSE:IBM), Exxon Mobil Corporation (NYSE:XOM), Pfizer Inc. (NYSE:PFE), and Cisco Systems, Inc. (NASDAQ:CSCO) — accounted for more than $76 billion in share buybacks between them, according to the Wall Street Journal.
Reason #5 the Stock Market Rally Is Far From Over: Debt Service Ratios Near Record Low
Last but not least, the somewhat obscure household debt service ratio (DSR) — the percentage of disposable household income dedicated required debt payments — is near an all-time low.
In short, this measures how leveraged the average American household is. At 9.92%, it’s at the second-lowest reading ever, having declined about 25% from all-time highs near 13.2% in 2007.
With the labor market back on track, low interest rates and low oil prices serving as tailwinds, it looks like Americans are using some of that extra dough to pay off debt. Or perhaps the gains in cash flow simply exceed any increases in debt.
Either way, we’re not leveraged to the hilt like we used to be, and that’s giving consumers the ability to go out and make big economic decisions: Mortgage applications rose 49% for the week ended Jan. 9, a sign that many Americans are refinancing in order to lock in lower interest rates.
This will help the cash flow of the average American household going forward, giving consumers more money to spend — and invest.
As of this writing, John Divine was long shares of AAPL stock. You can follow him on Twitter at @divinebizkid.
