 "US stock market rally outpaces economy")
The stock market, continuing a remarkable ascent that began in the darkness of the last recession, surged past a milestone on Thursday after a strong jobs report indicated that the economy might finally be gaining steam.
The Dow Jones Industrial Average, which measures the share price performance of 30 blue-chip companies, broke through 17,000 for the first time. It closed at 17,068.26, up 92.02 points, or 0.54 per cent. The Standard & Poor's 500-stock index, a broader yardstick, finished the day within striking distance of 2,000, closing up 10.82 points, or 0.55 per cent, at 1,985.44, a record.
The S&P 500 is now nearly three times its low point in 2009, when the economy was in free fall and the government was scrambling to shore up the financial system. When adjusting for inflation, however, the S&P 500 is still below its peak in 2000.
The stock market's rally has taken place even as a tepid economy has failed to lift the incomes of many Americans. The economy unexpectedly shrank in the first quarter. Still, there are signs that economic growth is starting to pick up. The stock market records were set after the government announced on Thursday that the economy had added 288,000 jobs in June, more than analysts had been expecting.
"While the economy has been slower than people would have liked, there are signs that it has continued to improve," said Shep Perkins, a portfolio manager at the Putnam Global Equity Fund. "You could see the S&P at 3,000 in three to four years."
The current bull market has lasted nearly 64 months, making it the fourth-longest since the crash of 1929, according to an analysis by S&P Dow Jones Indices. And in recent years, the United States stock market has substantially outperformed those of Europe, Japan and China.
Some individual investors have benefited from the rally. The value of stocks and mutual funds held by households increased by more than $3 trillion in the 12 months through March, according to data from the Federal Reserve. But such gains will have mostly gone to the wealthier households, where stock ownership is concentrated. "The trickle down is not working," said Douglas Kass of Seabreeze Partners Management, a hedge fund firm. "The schism between haves and the have-nots has widened."
Stronger corporate profits have helped sustain the rally. Some companies have bolstered their bottom lines in part by restraining expenses. But investors seem most excited about younger companies with strong growth prospects.
Stock in Facebook, for instance, has risen more than any other in the S&P 500 over the last 12 months, soaring 170 per cent. Netflix is up 114 per cent. "Innovation has been a huge driver," Perkins, the mutual fund manager, said.
Reflecting the excitement about a new wave of technology shares, the Nasdaq index has climbed strongly, closing at 4,485.93 on Thursday, putting it a little more than 10 per cent below its peak in 2000 during the technology bubble.
Still, some investors question whether the stock market can hold on to its gains.
One of the most surprising features of the most recent bull market is that it has taken place during a drawn-out period of economic sluggishness. During the extended rallies of the 1990s and the 2000s, the economy grew at about 3 percent a year, double the growth rate of the latest ascent.
And not all investors are convinced that growth is poised to accelerate. The mood in the bond market, for instance, is circumspect. The yields on bonds have fallen this year, indicating that investors believe the Fed will have to keep interest rates low to prevent the economy from stalling.
The 10-year Treasury note closed with a yield of 2.64 percent, down from just more than 3 percent at the end of last year. "This demonstrates that bond investors are sceptical about the economic recovery," said Timothy M. Ghriskey of Solaris Asset Management. "And rightly so, because we saw a weak economy in the first quarter."
To stimulate the economy, the Fed has pumped more than $3 trillion into it to spur growth and the banking system since the financial crisis. But some investors assert that this stimulus has helped generate speculation in the stock market while having a limited effect on the real economy. "There has been no escape velocity in the economy," Mr. Kass said. "We are dependent on the kindness of the Federal Reserve."
As the economy recovers, the Fed is gradually injecting less money into the financial system. If profits and the economy grow robustly, stock market investors may not care that there is less monetary stimulus. But if the withdrawal causes a tightening in financial conditions, the appetite for stocks might dwindle.
For now, however, financial markets have been trading with little volatility. The Federal Reserve Bank of St. Louis said on Thursday that its "financial stress index" was at a record low, which means investors in many markets are not worried yet.
But to some analysts, the market is too calm.
One big question that skeptics have is whether the rally has made stocks overvalued, and potentially vulnerable to a decline. There are many ways to assess how expensive stocks are, and bullish and bearish investors often use different yardsticks to make their case.
Optimists, for instance, note that the stock market value of the companies in the S.&P. 500 is 16.5 times the 2014 profits that analysts expect for those firms. That ratio is not particularly high by historical standards, they say. "Valuations are not extreme by any means," Mr. Ghriskey said.
But the sceptical analysts contend that the stock market is trading at lofty valuations when using longer-term comparisons of earnings and stock prices, including a yardstick devised by Robert J. Shiller, a professor at Yale. This measure shows the stock market is trading at close to the valuation it had before it plunged in 2008.
And Gerard Minack of Minack Advisors says that he has noticed a particularly disquieting feature in the latest rally. During past peaks, even though some stocks were significantly overvalued, many others had attractive valuations. Now, he says, almost no companies in the S.&P. 500 are real bargains. "What is cheap is cheap for a very good reason," Mr. Minack said. "Everything else is rich or fully valued."
The stock market's optimists, however, say such concerns are overblown. Corporate earnings, they say, could post substantial gains if the European and Asian economies bounce back. "That has to be the hope of the equity markets," Mr. Ghriskey said.
The Dow Jones Industrial Average, which measures the share price performance of 30 blue-chip companies, broke through 17,000 for the first time. It closed at 17,068.26, up 92.02 points, or 0.54 per cent. The Standard & Poor's 500-stock index, a broader yardstick, finished the day within striking distance of 2,000, closing up 10.82 points, or 0.55 per cent, at 1,985.44, a record.
The S&P 500 is now nearly three times its low point in 2009, when the economy was in free fall and the government was scrambling to shore up the financial system. When adjusting for inflation, however, the S&P 500 is still below its peak in 2000.
The stock market's rally has taken place even as a tepid economy has failed to lift the incomes of many Americans. The economy unexpectedly shrank in the first quarter. Still, there are signs that economic growth is starting to pick up. The stock market records were set after the government announced on Thursday that the economy had added 288,000 jobs in June, more than analysts had been expecting.
"While the economy has been slower than people would have liked, there are signs that it has continued to improve," said Shep Perkins, a portfolio manager at the Putnam Global Equity Fund. "You could see the S&P at 3,000 in three to four years."
The current bull market has lasted nearly 64 months, making it the fourth-longest since the crash of 1929, according to an analysis by S&P Dow Jones Indices. And in recent years, the United States stock market has substantially outperformed those of Europe, Japan and China.
Some individual investors have benefited from the rally. The value of stocks and mutual funds held by households increased by more than $3 trillion in the 12 months through March, according to data from the Federal Reserve. But such gains will have mostly gone to the wealthier households, where stock ownership is concentrated. "The trickle down is not working," said Douglas Kass of Seabreeze Partners Management, a hedge fund firm. "The schism between haves and the have-nots has widened."
Stronger corporate profits have helped sustain the rally. Some companies have bolstered their bottom lines in part by restraining expenses. But investors seem most excited about younger companies with strong growth prospects.
Stock in Facebook, for instance, has risen more than any other in the S&P 500 over the last 12 months, soaring 170 per cent. Netflix is up 114 per cent. "Innovation has been a huge driver," Perkins, the mutual fund manager, said.
Reflecting the excitement about a new wave of technology shares, the Nasdaq index has climbed strongly, closing at 4,485.93 on Thursday, putting it a little more than 10 per cent below its peak in 2000 during the technology bubble.
Still, some investors question whether the stock market can hold on to its gains.
One of the most surprising features of the most recent bull market is that it has taken place during a drawn-out period of economic sluggishness. During the extended rallies of the 1990s and the 2000s, the economy grew at about 3 percent a year, double the growth rate of the latest ascent.
And not all investors are convinced that growth is poised to accelerate. The mood in the bond market, for instance, is circumspect. The yields on bonds have fallen this year, indicating that investors believe the Fed will have to keep interest rates low to prevent the economy from stalling.
The 10-year Treasury note closed with a yield of 2.64 percent, down from just more than 3 percent at the end of last year. "This demonstrates that bond investors are sceptical about the economic recovery," said Timothy M. Ghriskey of Solaris Asset Management. "And rightly so, because we saw a weak economy in the first quarter."
To stimulate the economy, the Fed has pumped more than $3 trillion into it to spur growth and the banking system since the financial crisis. But some investors assert that this stimulus has helped generate speculation in the stock market while having a limited effect on the real economy. "There has been no escape velocity in the economy," Mr. Kass said. "We are dependent on the kindness of the Federal Reserve."
As the economy recovers, the Fed is gradually injecting less money into the financial system. If profits and the economy grow robustly, stock market investors may not care that there is less monetary stimulus. But if the withdrawal causes a tightening in financial conditions, the appetite for stocks might dwindle.
For now, however, financial markets have been trading with little volatility. The Federal Reserve Bank of St. Louis said on Thursday that its "financial stress index" was at a record low, which means investors in many markets are not worried yet.
But to some analysts, the market is too calm.
One big question that skeptics have is whether the rally has made stocks overvalued, and potentially vulnerable to a decline. There are many ways to assess how expensive stocks are, and bullish and bearish investors often use different yardsticks to make their case.
Optimists, for instance, note that the stock market value of the companies in the S.&P. 500 is 16.5 times the 2014 profits that analysts expect for those firms. That ratio is not particularly high by historical standards, they say. "Valuations are not extreme by any means," Mr. Ghriskey said.
But the sceptical analysts contend that the stock market is trading at lofty valuations when using longer-term comparisons of earnings and stock prices, including a yardstick devised by Robert J. Shiller, a professor at Yale. This measure shows the stock market is trading at close to the valuation it had before it plunged in 2008.
And Gerard Minack of Minack Advisors says that he has noticed a particularly disquieting feature in the latest rally. During past peaks, even though some stocks were significantly overvalued, many others had attractive valuations. Now, he says, almost no companies in the S.&P. 500 are real bargains. "What is cheap is cheap for a very good reason," Mr. Minack said. "Everything else is rich or fully valued."
The stock market's optimists, however, say such concerns are overblown. Corporate earnings, they say, could post substantial gains if the European and Asian economies bounce back. "That has to be the hope of the equity markets," Mr. Ghriskey said.
©2014 The New York Times News Service