In case you haven't noticed, the stock market has been red-hot.
The S&P 500 has soared a remarkable 7.4 percent (as of Monday morning) so far in 2012. In fact, last month was the best January for the index since 1997, when the market was in the midst of one of the greatest bull runs of all time.
The market has rocketed 23 percent since the recent lows in October and both the S&P 500 and the Dow Jones Industrial Average are at near post financial crisis highs.
Perhaps the market has gotten ahead of itself. After all, this is still a historically weak recovery and there are several looming threats that could derail the market at any time.
But, there are also several good reasons for the market upswing.
• Money has no place else to go
The 10-year Treasury currently pays about 2 percent and a three year CD is paying about 1 percent on average. Meanwhile, Europe may well be in recession and emerging market growth is slowing. In fact, the returns on those markets have been lousy. With interest rates near record lows and foreign markets struggling, the U.S. stock market is the only game in town to earn decent returns.
• The economy is looking strong
For the first time since the financial crisis, economic growth is being driven primarily by the private sector. In January, nearly a quarter million jobs were created. Not only did the unemployment rate fall to 8.3 percent, but the underemployed (a measure with includes those with part time work that can't find full time jobs) fell significantly as well.
Vehicle sales in the U.S. increased 11.4 percent in January, about twice the increase expected. Copper prices, considered a barometer of economic activity, have begun to soar. And, of S&P 500 companies that have reported fourth quarter earnings so far, more than two thirds have beaten expectations.
• Europe is perceived as less of an immediate threat
Although Europe may just be buying time, the risk of a full blown crisis no longer appears imminent.
That said, many argue that the markets factored in a lot of this good news and have gotten pricey. But, history shows that not to be the case.
The S&P 500 currently sells at a multiple of 13.7 times earnings, a level well below the historical average (since 1954) of 16.4 times. As a matter of fact, the index would have to move about 30 percent higher to trade at average valuations.
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As well, markets have risen without a lot of volume and buy-in from most investors.
December marked the slowest month for buying and selling activities on the major indexes in four years, and January hasn't looked much better. Long term mutual funds (not money markets) have seen net outflows in five of the past seven months. In the first full week of January, mutual fund outflows outnumbered inflows more than 6.5 to 1.
A change of attitude from many of these investors could be a catalyst to propel the market higher going forward.
To most investors however, the market still seems treacherous. A rising market combined with looming threats such as Europe, Iran and slowing emerging market growth; seem to be setting us up for a fall. Such a fall seems quite realistic with the memory of the financial crisis still fresh in the minds of investors.
But, threats of another crisis are keeping the market as low as it is.
If no threat materializes, solid fundamentals should drive the market higher, at least for this year.
About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.
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