Why Are Stocks Hitting All-Time Highs?

The year 2013 has been another great one for the stock market. The Dow Jones Industrial Average (DJINDICES: ^DJI  )  is up 22.8% for the year, and it appears that nothing can upend the market's momentum. Sequestration hasn't made a dent, the government shutdown was brushed off, and even continued weakness in Europe hasn't affected U.S. stocks.

You can see below that, not only has the Dow Jones Industrial Average gained a significant amount this year, but some of the most diverse and economically dependent companies have led the market. 3M (NYSE: MMM  ) has exposure around the world, Microsoft (NASDAQ: MSFT  ) is a leader in all parts of tech, and Boeing (NYSE: BA  ) is dependent on businesses and consumers flying to increase profits. Yet, all three companies are up despite a pretty weak economic recovery.

^DJITR Chart

^DJITR data by YCharts

So, why is the stock market doing so well if unemployment is still 7.3%, and it doesn't look like the recovery has reached all parts of the economy? Let's take a look at what investors see.

The economy is improving
Believe it or not, the economy is getting better. Since the beginning of the year, the number of layoffs are down, the unemployment rate is down, and GDP is up.

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts

These statistics may not be as good as we want, but they're improving, and that will help drive profits.

Earnings are up
Long-term, what drives stock prices is earnings. On that front, we're doing quite well. Let's take a look at those same three companies, and see how earnings have trended over the past three years.

You can see below that there are some dips and dives, especially for Microsoft, which wrote down $6.2 billion in 2012 because of a botched acquisition; but, generally, the trends are higher.

BA Net Income (TTM) Chart

BA Net Income (TTM) data by YCharts

The good news here is that there's still fuel left to drive profits higher. A total of 7.3% of Americans are still unemployed and, as they get jobs, there's more money flowing through the economy.

There's also $1.48 trillion of cash just sitting in the bank accounts of U.S. companies. When they see significant economic growth, they'll put that money to work, giving another boost to the economy. 

The economic recovery may not be as fast as some had expected, but it's happening slowly, and when it picks up steam, there will be room for profits to grow even more.

Flow of easy money
The final reason stocks are up significantly this year is the flow of easy money from the Federal Reserve. Not only are short-term interest rates near 0%, but the Fed is buying long-term bonds with an $85 billion per-month plan intended to keep interest rates low.

This pushes borrowing rates for companies down, and also pushes investors into stocks and away from low-yield bonds. The money flow alone is enough to push markets higher.

Foolish bottom line
It may not seem like a year when the market should be up as much as it is, but there are a variety of factors pushing stocks higher. The crazy thing about the stock market is that, short term, it may not make a lot of sense at all. Next year, we could see the economy boom, and stocks fall flat.

That's why we tell investors to stick around for the long haul. There will be bumps along the road, but you won't miss out on a booming market like we have had this year.

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Read/Post Comments (10) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2013, at 9:45 AM, onesideoranother wrote:

    What your article eludes to is accurate up to a certain point. The Fed's QE is artificially pumping up the economy with no way to take the GDP to the point it would need to go to repay 15 Trillion Dollars. The more that the stock market is pumped up and people get used to easy money the harder it will be when the bubble bursts. The Fed can not sustain the pace. When the money from the printing pressses that is being held in banks as fuel for loans, comes unto the market, there will be hell and inflation to pay. Your optimism is genuinely enlightening, but I do not hear anybody or this article say anything about a plan to bring us out of this quagmire. Your optimism is dangerous and worse, unfounded. Take all your graphs from above and equate a 15 Trillion Dollars debt, and additional amounts disappearing at a rate of 1.6 billion dollars per day. In your heart of hearts you know what that equals. Wake up and tell your readers the truth and what they should be investing in to save their hard earned money when the piper comes to call. OR as you say, let's have a party till it falls off the cliff.

  • Report this Comment On November 09, 2013, at 11:31 AM, PIKESPONDER wrote:

    I'm with the writer above. Your overly optimistic "dribble" based on three stocks is absurd. The only reason Microsoft is soaring is the thought of a new CEO. Where did you fit IBM into your theory? The only reason the market is soaring is the FED, plain and simple. When you look at profits of major companies, very few are because of higher revenues, but through cost cutting measures. The FED's policy of cheap money has affected very few in a positive way. (The 1%). Please explain how with the economies in Europe constantly in turmoil how our dollar keeps worsening? Every dollar we print is worth less than the one before. For those poor Americans that have to buy gas, oil or food it costs more money than necessary. Thank you Bernanke!! And, if you believe that the "real" unemployment rate is only 7.3% you're bigger "Fools" than I believe. The day of "reckoning" is coming and once again the small investors who heed your dribble will be burned. The 1% will be out of the market at the speed of light.

  • Report this Comment On November 09, 2013, at 1:45 PM, cityperson wrote:

    So, the funny money from the Fed is keeping the stoick market up. But our dollar is down. The bubble is close and the average person that is not up on the stosk market and following the Fed has no idea. On how much funny money is being printed for the Wall Street and others in thta area.

  • Report this Comment On November 09, 2013, at 2:26 PM, Bshaef wrote:

    While you guys moan about the terrible economy, I'll stay fully invested. I've made more money in the last 10 months than I made in the previous 5 years on the market. Two of my largest holdings are MSFT and BA. I have learned one lesson for sure - don't let you political leanings color your thinking about the market. It is neutral.

  • Report this Comment On November 09, 2013, at 4:42 PM, d777742 wrote:

    By March 2014anyone who hasn't signed up for Obamacare will be fined by the FEDS.Young adults who never paid for healthcare before will be paying $3,600.00 annually . I feel this loss of discretionary income will be a shock to the economy. The stock market could tank and eventually recession would be here.

    Obama should have provided free healthcare for all americans by gutting corporate welfare, billionaire tax shelters, billions in aid to every country on earth, $500.00 toilet seats, fine all companies outsourcing jobs.

    If our leaders could get their heads out of their ***** we might stand a chance.LOL

  • Report this Comment On November 09, 2013, at 10:01 PM, fredjohnson55343 wrote:

    "Long haul". yep. Good advice.

  • Report this Comment On November 10, 2013, at 1:56 AM, RyanPeckyno wrote:

    The European Central Bank just cut interest rates to a new low -- which should serve as a catalyst for the eurozone's recovery. And hopefully improve its jobless rate (12.2%). All factors considered, I don't feel that Europe is looking all that bad right now (for investment opportunities).

  • Report this Comment On November 10, 2013, at 9:37 AM, hollywoodlafl wrote:

    Travis is obviously a "Fool" (pun intended) and it's obvious that he's "Out of Touch", with the American people, struggling to make ends meet!

    I am so G-D sick and tired of hearing the same old BS line, that "The Economy is Improving!"

    NO IT ISN'T!!!!!!!!!!!!!!!!!!!!!!!!

    You CANNOT accurately gauge how the economy is doing, in part, due to new UI claims filed OR The "Dropouts" of UI claims. These MAY BE people who no longer qualify, for whatever reasons. so, when the rate drops, it could be a number of reasons as to why...not because people necessarily found work.

    When employers are expected to opt in to the 'affordable health care' BS, watch and see many people thrown into PART TIME status, so that employers don't have to comply to the "Act". This will increase their profit margins for employers, but employees will be further pinched financially.

    Rumor has it that this stupid gov't is going to raise the Minimum Wage. This is going to have an adverse effect on any supposed 'recovery' boasted and bragged about by these again, 'supposed' economists.

    It's all 'Smoke and Mirrors', folks and it's constantly babbled over the airwaves, to psychologically convince you, that everything is "Fine", your job is secure, yadi, yadi, yada..., so that you go out and spend, spend, spend!

    WAIT AND SEE, this coming holiday season, what's going to start to occur...

    All this happy horsemanure that you're hearing, is going to convince you to spend...DON'T BUY IT!

    With the MANDATORY Healthcare that you're forced to now have AND the cutting of food stamps for the millions of those on it, prepare yourself for a DISMAL (at best) "2014".

    If the gov't actually raises the minimum wage, I would even go as far as saying, that 2008 was a "Picnic" compared to what will occur!

    Businesses will close their doors and people will lose their jobs.

  • Report this Comment On November 10, 2013, at 10:39 AM, pritche wrote:

    While this article does a decent job of explaining some of the current short-term trends it is far from explaining what is really happening. Maybe that's why it’s called "Fools". This article fails to recognize the fact that more U.S. multinational corporations, through the use and protections afforded by our government and military, have simply created more markets to which they may buy and sell their goods and services. Costs are too high here? No demand? Companies can go elsewhere. We have free-traded, automated and immigrated ourselves out of competitive value. We are no longer competitive with countries that basically pay their workforce next to nothing. Another incorrect assumption is that the current unemployment statistic that is published is a reasonable assumption of the current situation. What the article does not mention is how the unemployment statistic is reported. When a person files for and receives unemployment they are included both in the numerator and denominator. However, when their unemployment runs out they are taken out of both the numerator and denominator INCORRECTLY reporting that the unemployment situation is improving. Which is a real tragedy and an insult. As a result, Americans have been laid off in droves. Not because they have a choice, fat, lazy. They have been forced out and are desperately trying to find any source of employment. Don’t forget lying is protected free speech under the first amendment. Nothing is ever what it seems.

  • Report this Comment On November 10, 2013, at 3:55 PM, desuhu wrote:

    I've been saying for a year or more that I don't see how this market can keep going up. I agree with most of the commenters above. The economy is NOT going great like the government would like us to believe. Just ask all those millions who are out of work and the rest who can only get 25 hrs. a week. When it bursts and it will, things will get rough fast.

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11/25/2014 4:31 PM
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