MarksJarvis: 5 reasons stocks are trading higher

The Dow Jones industrial average is up 22 percent this year — a surprising gain for a period when investors fretted about a lackluster economic recovery

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The Dow Jones industrial average closed slightly less than 24 points short of 16,000, at a record high Monday.

The benchmark has climbed 22 percent this year — a surprising gain for a period when investors fretted about a lackluster economic recovery.

Why did we get here?

Investors believe in a global recovery

While badly lagging previous recoveries, the U.S. economy has slowly been gaining strength, China has adopted reforms that are expected to help, and Europe is slowly emerging from recession. Business confidence has been growing worldwide, according to Barclays. Stock prices are supposed to reflect a view of the future. In a speech Monday, Federal Reserve Bank of New York President William Dudley said: "I believe a good case can be made that the pace of growth will pick up some in 2014 and then somewhat more in 2015."

Companies keep profits coming

Stocks tend to rise when most companies are reporting profits that are higher than expected. As the third-quarter earnings reporting season comes to a close, once-nervous investors have been relieved by earnings that are beating expectations. Sales have been inhibited by the weak economy, but earnings are up 5.6 percent and profit margins are at record levels as companies find efficiencies in a tough global environment.

Don't fight the Fed

In testimony before the Senate last week, Federal Reserve chair nominee Janet Yellen sounded as though she remains concerned about the weak jobs market and won't be in a hurry to pull back on Fed stimulus known as quantitative easing. That was music to investors' ears. They have wanted a sense that the Fed would continue bond buying to keep interest rates low.

No other alternative

The Federal Reserve has intentionally kept interest rates low so that people would put money into risky stocks and bonds and help the economy grow. Those low interest rates have made safe bonds, savings accounts and certificates of deposit distasteful to anyone wanting to earn interest. Now, investment advisers are steering clients into stocks because they know bonds will lose value as interest rates start rising when the Fed lets up on stimulus. Though they aren't sure when the Fed will act, bond yields have climbed to about 2.8 percent from 1.6 percent in anticipation of the Fed's next step. And with those rising yields, bond investors in 10-year Treasurys have lost about 10 percent this year.

Pros are scared of losing clients

When it gets to be this late in the year, and the stock market keeps climbing, professional investors see no reward in being conservative. If they doubted the rally earlier in the year, their investments probably haven't kept up with the stock market's 22 percent gain. And they know that at the end of the year, clients will be angry and probably dump them if they don't deliver. The so-called Santa Claus rally that sometimes occurs toward the end of the year is often driven by fund managers who feel compelled to buy stocks to catch up.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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