Monday, January 17, 2011

Stock market recovery appears firmly on track

This article isn't about real estate per say, but it is about the state of our economy and how it is starting to look better with each passing month. And although we may take a step back every once in a while, this is proof positive that the economy is actually becoming more stable and slowly, but surely coming out of its doldrums.

Dow Jones for past 12 months
The stock market's solid performance from 2010 has quietly continued into the new year and put an extra shine on what already was a smooth, wealth-generating machine.

Major indexes are at bull market highs. The broad market has doubled from the 2009 low. And important segments of the market are breaking out to record highs.

"We're back off to the races," says Michael Farr of Farr Miller and Washington.

Concrete signs of the market's progress include:
Doubling from the bottom. The broad Wilshire 5000 index, a measure of the entire stock market, gained 1.8% last week to close Friday 100% above its hair-raising March 9, 2009, low. That means $8.3 trillion in shareholder wealth has been created since the bull market began.

Notching new records for key corners of the market. The Standard & Poor's MidCap 400 index, a measure of companies that fall between being large and small, set its highest point ever Friday, completely erasing the damage from the credit crisis-inspired bear market.

Meanwhile, the Wilshire US Small-Cap index also rubbed out the bear market by setting a record, topping its level on July 13, 2007.

Carrying on a powerful winning streak. The Dow Jones industrial average has gained seven consecutive weeks, the longest winning streak since the seven weeks ended April 23, 2010.

Investors are rushing into stocks on the belief the government will do anything necessary to stimulate the economy, says Jack Ablin of Harris Private Bank. U.S. stocks benefit as investors shift out of safer investments such as bonds in addition to less-certain emerging markets, he says.

Optimism over fourth-quarter earnings reports is also fuel for stocks, says Peter Cardillo of Avalon Partners. Earnings season kicks into high gear this week, and S&P 500 companies are expected to report 27% higher fourth-quarter profit as a group.

And it's exactly this consistent earning power from companies that justifies why stocks can finally hit, or even exceed, key milestones, says Rod Smyth of RiverFront Investment Group.

Overall earnings from companies in the S&P 500 are up more than 50% since 2000. During that same time stock prices have been stagnant, Smyth says. That means companies, in many cases, are now generating the earnings that warrant their peak stock prices, he says. That's especially the case with small and midsize companies that didn't see their stocks get pushed up as much in previous bull markets, he says.

The S&P 500 is still 17% away from its high, but if earnings keep up, stock prices can finally catch up, he says.
While a pullback is always a risk after such a big move in stocks, "The appetite for equities is going to continue to grow," Cardillo says.

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