Why Is the Stock Market Still Rising? Six Takes From Investing Experts

By Sterling Wong  APR 03, 2013 12:21 PM

The characteristics of this rally have market-watchers debating what's real and what's not.

 


It’s been an incredible 2013 so far for US equities, and the party does not look like it’s ending anytime soon.
 
The Dow (INDEXDJX:.DJI) hit yet another intraday high today, while the S&P 500 (INDEXSP:.INX) also came within a few points of its all-time intraday record of 1,576.09 set in October 2007. The Nasdaq (INDEXNASDAQ:.IXIC), while still some distance away from its dot-com bubble era record, also reached a 12-year high earlier in March.
 
Wall Street has offered several takes on what’s propelling this bull run. The one thing most analysts can agree on, of course, is that the Federal Reserve’s easy-money policies have helped greatly.
 
The Fed has pushed bond yields down so much (US 10-year Treasury note yields are now below 2%) that return-seeking investors are turning to riskier asset classes like equities.
 
It’s also likely that investors have been buoyed by improving economic fundamentals. The US housing market has improved steadily, while corporations reported robust profits in the most recent quarter. Jobs growth, while still far from desirable, has shown steady improvement in recent months, with the unemployment rate now at a four-year low of 7.7%.
 
Another factor helping to prop up the stock market has been the big number of companies that have bought back shares. February was the biggest month ever in share buybacks, with some $117.8 billion in stock repurchases announced. Companies are either using the cash they have been sitting on since the Great Recession or taking advantage of the Fed’s low interest-rate policies to borrow money to fund their share repurchases.
 
By reducing the number of shares outstanding, companies typically see their stock price rising, because earnings-per-share, an important measure of profitability, is improved. A share buyback program is also a sign to an investor that a company is confident of the strength of its balance sheet. Dealbreaker’s Matt Levine calculates that “[mergers and acquisitions] and buybacks, net of new issuance, are responsible for about 9% of the last four years’ bull market.”
 
And in case you think that it’s too late in this equity bull run for you to join in, some expets argue otherwise.

“[The] health of this market top is vastly more robust than previous ones. Currently, 85% of the stocks in the (SPX) are trading above their 200 day moving averages, compared to only 50% when markets peaked in 2007, when the market action was far more concentrated in a handful of stocks,” asserted John Thomas at Diary of a Mad Hedge Fund Trader earlier in March. “Such a broad base suggests that a lot of managers are still underinvested, and that the pain trade is to the upside.”

Minyanville’s own Jeff Saut also argued that we are only at stage two of a six-stage bull run, where “guarded optimism” is still in the air. According to Saut, this recent equity surge still has years of life in it, and that while “we are due for some kind of pullback," he continues to believe that "any pauses/pullbacks are for buying.”
 
(See also: The 6 Stages of Bull Markets -- and Where We Are Right Now.)

Not all stock market experts are as bullish as Thomas and Saut, however. Legendary investor Jim Rogers, the chairman of Rogers Holding, said that the current market surge "is very artificial."

"If you give me a trillion dollars, I'll show you a good time too, and a lot of people are having a good time. I'm somewhat skeptical because I know it's going to end badly," he recently told CNBC. "I'm certainly not investing in the US, because the US is making all-time highs based on money printing. The whole world is benefiting from all this money being printed, but there are better places than where the all-time high is."

Similarly, Warren Buffett might feel that stocks are overvalued right now. According to Buffett, the total value of all the stocks in the Wilshire 5000 Total Market Index (INDEXNASDAQ:W5000) should not exceed the US gross national product (GNP). But as Townhall's David Sterman noted, the Wilshire 5000 total has now hit $16.57 trillion, whereas the US GNP at the end of 2012 was $16.13 trillion. There have only been two occasions when the Wilshire 5000 has exceeded the value of the US GNP: in 1998 and 2007. In both cases, Sterman pointed out, the market continued to rise but then fell off a cliff.

Minyanville's own Todd Harrison also offered a less than sanguine opinion. Pointing out that commodities, which typically have a strong correlation with stocks, have missed out on the recent equity bull run, Harrison said, “it would appear that [going forward] either commodities must rally, stocks must fall, or a combination thereof.”

Pimco's Mohamed El-Erian, meanwhile, says he does not know how the future looks. Calling today's capital markets "unprecedented" and "artificial" thanks to Fed policies, El-Erian said that "there are no historical precedents or reliable models investors can use to predict the future."

(See also: The US Stock Market: Where Do We Go From Here? and The Smartest Man in Global Capital Markets on When the Music Will Stop.)

Twitter: @sterlingwong
No positions in stocks mentioned.

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