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


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.


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.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers