Credit: Shutterstock photoAs America prepares to celebrate Thanksgiving and financial markets slow down in anticipation, many investors’ thoughts are turning to broader, macro concerns. It has, so far, been a better year than many anticipated. The S&P 500 closed 2013 at 1848.36, around 30 percent up on the year and most commentators felt that this year would see a slight pause and more restrained growth. To some extent, that view was correct, but even so the S&P is having a good year so far, up over 14 percent.
With each positive day seeing new highs in both the Dow Industrials and the S&P, however, stocks are climbing a wall of worry. In some ways that worry is more intense for NASDAQ investors, where the Composite index has continued to post strong gains and is now only just over 6 percent away from the all time high close of 50487.62 that was reached in March of 2000. Most people remember what followed that.
The worry is natural and understandable, but it is hard to find a reason why stocks are in danger of a major collapse in the near future. Put simply, stock prices are a reflection of corporate profitability which in turn is a reflection of overall economic conditions. This morning’s revision of Q3 GDP once again emphasized that the U.S. economy is continuing to grow, with the rate of growth gradually increasing.
That revision saw the original estimate of 3.5 percent growth increased to 3.9 percent. Combined with the second quarter’s final number of 4.6 percent this represents the strongest half year period of growth in the U.S. economy since 2003, which was followed by four more years of significant market gains. Those worrying about similarities to 2000 would be better off focusing on that fact than on proximity to a numerical high from 14 years ago.
What gets overlooked often as historical highs in indices are reached is that there is a degree of inevitability to that. The stock market has continued to grow exponentially since its founding and will continue to do so as long as the human race continues to innovate and improve. Why anybody would bet against that happening is a mystery to me.
More specifically, the U.S. economy is at a remarkable juncture right now. We have interest rates at historic lows, housing and employment markets that are still improving, increasing consumer confidence as a result, and, to cap it all, lower oil prices are beginning to translate to prices at the pump just as the Holiday season looms.
There are even signs in the latest employment numbers that some degree of wage inflation is creeping back into the U.S. economy. Inflation is not always bad. The one criticism that has remained of this recovery is that the benefits have been too concentrated in the upper tier of wage earners, resulting in no corresponding surge in demand. When even that is changing and everything else remains positive it is hard to be negative on prospects.
None of this means, of course, that investors should be complacent. Economic conditions can change quickly and the one thing we know about what will, at some point, change the outlook is that we don’t yet know what it is. That said though, if the fact that new highs on the indices are being achieved or approached is what is worrying you, stop worrying and focus on fundamentals.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
