3 Reasons Why You Should Still Buy Stocks

Even as major stock indices hover just below their all-time highs, there are a variety of convincing reasons that stocks have a lot more room to run.

Aug 23, 2014 at 2:00PM

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Source: http://401kcalculator.org

Stock market indices are still trading close to all-time highs. The S&P 500 stands just below 2,000, and the Dow Jones Industrial Average Index is just over 16,650. Both indices have put in respectable returns over the past 12 months: The S&P 500 gained roughly 21%; the DJIA, 13%.

These remarkable runs have been going on for the past five years, as the U.S. economy has bounced back from its depressed state in early 2009. The S&P has returned around 190% since the economy bottomed out in March 2009, and the Dow has gained approximately 160%.

With a stock market rally under way for more than five years and equity indices close to their respective all-time highs, should you still consider buying stocks, or is the party over for investors?

Long-term investors should buy equities
Of course, there's no easy answer, and investors differ in terms of risk tolerance, investment horizon, and asset allocation needs.

But if you're a long-term investors who has a longer than a one-year time horizon, I would advocate for an investment in stocks, even though investors will have to pay a premium on their stocks compared with just a year ago.

Let's look at three reasons why, from an economic point of view.

1. Interest rates are still low
Though the stock market has rebounded strongly since 2009, interest rates haven't. The Federal Reserve has met the financial crisis with an unprecedented strategy of printing money while keeping interest rates at ultra-low levels.

The Fed is now cutting back on its monetary stimulus package, which is a positive sign for the economy, since that means the Fed considers the economy to be strong enough to grow without continued artificial life support. Meanwhile, interest rates are still near zero, and it will take a while to get them back to normalized levels of 2%-3%. But rise they will, and interest rates increase in a robustly growing economy. 

2. Consumer spending is likely to continue to increase
If the economy grows more dynamically, consumer spending will increase as well. As unemployment falls, incomes increase and confidence in economic prospects bounces back, consumers get ready to open up their wallets.

Consumer spending has already recovered to a great extent since 2008. That's good for the U.S. economy, which largely depends on consumption to drive GDP and income growth.

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Source: Tradingeconomics

Yet the economy still has a lot of room to grow, considering that the unemployment rate stood at 6.1% in June and interest rates are still near zero.

With growing consumer spending, cyclical sectors of the economy such as chemicals, transportation, industrials, financials, retail, and real estate should be doing fairly well in terms of stock market performance going forward.

3. Earnings growth
Many companies should see sizable earnings increases in the near to medium term. Retailers should especially see earnings tailwinds stemming from a continued recovery in consumer spending.

Increasing company earnings should lead to higher company valuations and index prices and make a strong case for continued investments in equities over the next couple of years.

The Foolish bottom line
The U.S. economy has great potential to continue its recovery. Other crucial growth impulses besides consumer spending could come from a stronger housing market and businesses that step up their investment spending.

All of those factors are indicative of economic growth, which should translate into higher equity valuations for publicly listed companies and higher stock market indices. The time for stocks is not over yet.

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