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Why Are Stocks Hitting All-Time Highs?

http://www.fool.com/investing/general/2013/11/09/why-are-stocks-hitting-all-time-highs.aspx

Travis Hoium
November 9, 2013

The year 2013 has been another great one for the stock market. The Dow Jones Industrial Average (INDEX: ^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