Dow, S&P Set Fresh Records: Why Are Stocks So Attractive?
The stock market has really been defying the odds so far this year. Stocks just saw their sixth straight quarter of gains, a number that really, when you think about it, shouldn’t have happened. But it did. According to USA Today, the Dow Jones Industrial Average gained 2.2 percent in the second-quarter of 2014, the S & P 500 jumped 4.7 percent, and the NASDAQ was up 5 percent. After a rather dismal start to the year, the strong second-quarter has set things off on a more positive foot, inspiring confidence in investors.
At the beginning of the year, the economy saw contraction of 2.9 percent, following a rough winter, and also a series of intense political happenings across the globe. The Russian annexation of Crimea is a notable example, which had effects on energy markets and more. The second-quarter brought about an approximate 5 percent gain, setting things back on track for overall growth. Speaking with USA Today, Prudential Financial market strategist Quincy Krosby says that investors may be acting with confidence simply because the long winter has finally ended.
“Right now, investors are giving the economy the benefit of the doubt due to the weather,” he said. “And the market is also taking a short-term sabbatical from geopolitical headline risk.”
But is that true, could the economy really have returned to form simply because the ice thawed? It sure does seem that way. Things did start off with contraction, and as the weather improved, so has economic balance. But there is a real possibility that overconfidence has overtaken many investors. There are some serious issues facing the world economy, and its hard to ignore them simply because summer has finally arrived. In fact, many analysts think we’re due for some some course-correction in terms of where the markets are headed over the third quarter.
“We are overextended in the short term, and I do see a bit of a near-term correction, but the dips are seen as opportunities to put cash to work,” Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research told The New York Times.
Despite the obvious risks to the world’s overall economy, investors have put their money to work over the past few months, helping the markets achieve the remarkable feat of six straight quarters of growth. But that doesn’t mean that there wasn’t any risk — more like many were choosing to ignore it. Huge geopolitical happenings around the world should have put many off with an uneasy feeling, but it appears that remarkably, that didn’t happen.
The biggest geopolitical event over the past little bit was the Russian annexation of the Crimean peninsula in the Ukraine, which was little more than a veiled hostile takeover and invasion. Russian president Vladimir Putin really put the world on edge, right after hosting the winter Olympics, by fostering revolution and then sending in troops. The fallout of Putin’s actions led to pundits discussing the resurgence of the Cold War, and also saw president Obama and other NATO members lay into Russia with sanctions, which could take a bit out of exports by as much as 35 percent, according to Russia and India Report.
That should have investors watching closely.
The other large-scale world event taking place is the recent arrival and incredibly threatening actions of ISIS in northern Iraq. Following the decade-long war waged by the United States and its allies, the pullout left a power vacuum in the country. Coupled with the ongoing civil war in Syria, along with longstanding ethnic conflicts between groups of Shiite, Sunni, and Kurdish peoples all living in different parts of those countries, the situation has escalated to a very serious and deadly level. There are a slew of American companies operating in the middle east, most notably energy companies, and their work is seriously threatened by what happens there.
One more reason for investors to paying attention.
Finally, the weather itself may be inspiring confidence, but it could also be a reason to hedge your bets. Climate change is starting to have very real effects. Because of that, lawmakers, along with president Obama, have levied some serious regulations for coming years in an effort to scale back the effects of changing climatic events. These regulations, while many would argue are needed, will definitely have an effect on industry, and most likely have an impact on many companies’ bottom lines.
One more thing to keep an eye on for investors.
Why Stocks Are Hot, Against the Odds
As we’ve seen, the market has continued to grow even in the face of serious events around the world, and the onset of regulatory changes brought on by the president and other lawmakers. What has investors unphased? It’s hard to say exactly, but some correction does seem to be imminent. That doesn’t necessarily mean the markets will crash at some point over the next few months, but the feel-good sensation brought on by nicer weather will start to decline, and for many, a march back toward reality will ensue.
How can the markets keep up momentum? It might not be able to. The market will continue to ebb and flow as it always does, it could just be due for a dip in the cycle. The recent events around the world will have an effect of some kind, and at some point in the near future. New data is due out soon, which may send some waves through the markets and curb investing activity to some degree, according to Reuters.
One example of a stock that has seemingly defied the odds so far is that of General Motors (NYSE:GM), who have had to recall millions upon millions of vehicles since the start of the year. Yet, the company has not seen a big effect on sales. Recent numbers do indicate that the stock is starting to see some decline, but even taking a look at the stock’s performance this year, it’s hard to tell that anything really went wrong.
This is exactly the kind of thing that will probably come to a head once investors leave their ‘honeymoon’ mindset behind.
For investors, stocks have been hot over the past several months, and their attractiveness has been undeniable. It’s important to play your hand carefully, however, as some of the things that have been ignored by the markets so far start to seep into the consciousness of investors. Proceed with caution.