Until Friday, the stock market was in a steady decline over the past two weeks despite a number of positive economic reports. The Dow Jones Industrial Average (^DJI 0.56%) fell almost 300 points from Thanksgiving to the close on Thursday. So, should we be bullish or bearish on stocks right now?
At The Motley Fool, we like to take the long view, overlooking short-term market gyrations and keeping the focus on long-term trends. Here are a few long-terms trends that I'm watching that make the market look extremely attractive.
Consumer spending is picking up
Consumers drive about 70% of the economy, so if the consumer is suffering, everyone is suffering. But there are lots of signs that consumer spending is picking up slowly but surely.
The following chart from the Bureau of Economic Analysis shows total disposable income (compensation left over after taxes) and personal consumption in the United States. Both are trending higher, and that's putting more dollars into the economy.
This may sound contrary to recent holiday spending reports, like the one from The National Retail Federation, which said that spending was down 2.9% over the Thanksgiving holiday weekend. But keep in mind that holiday spending is probably up overall. Online retail was up 17.3% last weekend, according to Comscore. Just because bricks-and-mortar retailers are struggling doesn't mean consumers are spending less this holiday season.
A Gallup poll last week says that shoppers spent $100 per day over the Thanksgiving weekend, up from $67 a year ago and another strong sign for the consumer.
Finally, the University of Michigan/Thomson Reuters consumer confidence index rose to 82.5 in a report released Friday, up from 75.1 in November.
If we take a long view, consumers are feeling better about the economy, and they're spending more as a result. That's good for the market in the long term.
Economic growth is picking up
The economy has been pretty sluggish coming out of the recession, but there are strong signs it is picking up. I pointed out that consumers are feeling better, and that's help drive GDP growth of 2.5% and 3.6% in the past two quarters. Taking an even longer view, growth has been steady since 2009.
What encourages me about improving growth recently is that there are tailwinds that will help the economy as growth picks up. U.S. corporations have $1.48 trillion of cash to invest once they see opportunities for growth. Seven percent of people are still unemployed, meaning there's labor and productivity to add to the workforce. Plus, the federal deficit was 4.1% of GDP in fiscal 2013 and will probably fall again next year. Government cuts that have been a drag on unemployment, and when cuts slow it will help the economy.
The economy often enters a reinforcing cycle in both good times and bad. It took a long time to get over the pain of the recession, but now that growth is picking up again, I think there are strong reasons to be optimistic about a positive reinforcing cycle in the economy in 2014.
The employment market is improving
Yesterday's employment report from the Bureau of Labor Statistics showed the economy creating 203,000 jobs, unemployment falling to 7%, and the labor participation rate increasing to 63%. These are all positive signs for the labor market and continue a slow and steady recovery.
As more people work, corporate revenues and profits will rise, and that should help the market. Higher employment should also be good for wages, because there will be fewer unemployed workers to choose from.
Better employment numbers help the economy in a variety of ways, and the improvement we've seen recently is one reason to be very bullish on the stock market.
Foolish bottom line
The Dow Jones Industrial Average was driven largely by multiple expansion this year, which means we'll need to see improved earnings to keep the market moving higher. With spending increasing, GDP growing, and unemployment falling, I think we will see earnings growth in 2014. That's why I see another good year for the market.
