NEW YORK, N.Y. – Stocks are nudging deeper into record territory after treading water for most of March and April and are closing in on milestones with lots of zeros attached to them. The Dow Jones industrial average is within 53 points of 17,000 while the Standard & Poor’s 500 is just shy of 2,000 after rising 6 per cent this year.
A harsh winter in the U.S. that hobbled growth made investors cautious. There were also worries about the conflict in Ukraine and slowing growth in China, the world’s second-biggest economy.
But now the economy appears to be on track again, and investors are rediscovering their appetite for stocks.
While 17,000 would be the first 1,000-point marker crested this year, the Dow had two in 2013. It closed above 15,000 for the first time on May 7, then above 16,000 on Nov. 21, during a year when the blue-chip index rocketed 27 per cent.
That double milestone was a long time coming, though. The Dow had finished above 14,000 six years earlier, in July 2007, just before the Great Recession.
In 2014, here are some of the factors driving stocks toward new milestones:
Recent good news on manufacturing and hiring has boosted confidence in the economy.
Manufacturing is expanding at a healthy pace, and the service industry continues to grow, according to surveys released by the Institute for Supply Management earlier this month.
U.S. employers added 217,000 jobs to their payrolls in May, the fourth consecutive month of solid job gains. The number of Americans filing for unemployment benefits has also dropped close to the levels seen before the recession began in December 2007.
More jobs should put more money into consumers’ pockets. That leads to greater demand and greater investment by companies, creating a virtuous circle, says Brad Sorensen, director of market and sector research for Charles Schwab.
“It’s in the early stages, but we’re starting to finally see a snowball effect where everything builds on itself,” Sorensen says.
Corporate profits are also rising. Earnings reports start to come in next month, and investors expect that second-quarter profits at U.S. companies will be up 5.4 per cent from a year ago, according to FactSet.
The market for mergers and acquisitions is heating up. Although the number of corporate deals is marginally lower than it was at this point last year, the transactions getting done are bigger.
The value of corporate deals has surged 62 per cent to $798 billion this year, from $494 billion a year ago, even though the number of acquisitions is about 3 per cent lower than last year, according to Dealogic.
M&A deals lift stock prices because the acquirer typically pays a premium for the company that it’s buying, and if there are multiple bidders, prices are pushed even higher.
The battle for Hillshire Brands, maker of Jimmy Dean sausages, is a good example.
Tyson Foods won a bidding war to buy Hillshire for $8.6 billion on Monday. The company ended up paying $63 a share for the food company about two weeks after rival poultry producer Pilgrim’s Pride made an initial bid of $45 a share. Before the bidding had started, Hillshire’s stock was trading at about $37.
Comcast’s $45 billion deal to buy Time Warner Cable, and AT&T’s bid for DirecTV are among other big deals this year, and online travel company Priceline said recently it was buying the online restaurant reservation company OpenTable for $2.6 billion.
MORE CENTRAL BANK STIMULUS:
Central banks around the world are stepping in to bolster struggling national economies. The latest big move came in Europe, when The European Central Bank cut interest rates and said it was ready to pump more money into the region’s financial system two weeks ago. The bank wants to head off falling prices in the 18 countries that use the euro and encourage lending.
When people expect lower prices, or deflation, they tend to put off purchases and investment, choking off growth. That is a disaster scenario the ECB wants to make sure does not happen.
ECB President Mario Draghi also pledged to do more if it was needed, raising the possibility that the bank will pursue a big Federal Reserve-style bond-buying program in the future. In the U.S., the Fed’s bond-buying program has pushed up both bond and stock prices.
As investors anticipated the ECB’s move, a chain reaction was unleashed in the world’s financial markets.
“Lower rates in Europe are going to tend to drag rates in the U.S. down and that, other things being equal, is going to make equities more attractive,” says David Lafferty, chief market strategist at Natixis Global Asset Management, an asset manager.
Investors bought European bonds, pushing down yields. That made U.S. Treasury note yields seem more attractive by comparison, luring buyers to the U.S. The yield on the 10-year Treasury note dropped from 3 per cent at the start of the year, to as low as 2.44 per cent May 28 as U.S. government debt rallied.
Lower long-term interest rates in the U.S. should support the economic recovery by keeping mortgage rates low and encouraging home-buying.
These lower interest rates have had a side effect of pushing up stock prices, both in the U.S. and elsewhere. When bond yields are so low across the world, stocks look cheaper by comparison. This in turn forces investors into the stock market instead of the bond market.
The ECB stimulus should support growth in Europe and benefit U.S. companies overseas.
The stimulus is “the first tangible step that Draghi has taken to really drive European growth,” says Lafferty.
THE WORLD OUTSIDE
A contraction in China’s manufacturing sector rattled stock markets at the start of the year, and other emerging market economies appeared on the brink of turmoil as their currencies plunged against the dollar.
Russia’s annexation of the Crimea region in Ukraine in March also unsettled investors, who feared that the conflict would escalate.
Those worries have eased for now. China’s manufacturing slump appears to have bottomed out, and tensions between Russian and Ukraine, while still simmering, haven’t boiled over into a wider conflict.
One place that could become a major problem for investors is Iraq. The recent violence in the region has some investors worried that Iraq could break out into another civil war. With Iraq having one of the largest proven reserves of oil, the violence could further drive up oil prices, causing gas prices to rise.