Nov. 11--A month after investors fretted that Ebola, Middle East fighting and worldwide deflation would pull the rug out from under the stock market, stocks have taken an impressive turn for the best.
Not only have stocks regained all that was lost, but they are soaring for the year.
With about a month and a half to go before year-end, the gain in the Standard Poor's 500 index already has exceeded the 10 percent historical average for a year in the stock market. This year, the market's up 10.34 percent after hitting new high after new high throughout the year. With dividends included, the gain is even more impressive -- more than 12.2 percent with the index at 2,039 and the Dow Jones industrial average at 17,615.
Despite analysts questioning the stock market's ability to keep climbing with stocks pricey and the world economy in a fragile state earlier this year, there have been 40 new highs in the stock market this year, including five in a row as of Tuesday. The stock market has surged more than 9 percent since stocks seemed destined for a correction after falling from early September to Oct. 15.
"The markets usually fall much quicker than they rise," noted portfolio manager Paul Nolte, of Kingsview Asset Management in Chicago. "Not this time. The buying frenzy has continued relatively unabated over the past three weeks."
He thinks investors have returned to their old ways, buying stocks because they can count on central banks to throw trillions of stimulus dollars into the markets. Europe and Japan are buying bonds to stimulate moribund economies; they "will continue to push money out the door and keep safe alternatives, like bonds, from paying much interest."
Of course, investors know that a robust stock market climb doesn't necessarily predict a continuation of the trend. But after a period of decent profit reports by companies for the third quarter and fund managers buying stocks so they can improve glum numbers from earlier in the year, analysts such as Goldman Sach's David Kostin think there are still more gains to come this year.
"Positive macro and micro drivers have jointly supported the 9 percent surge in the S 500 during the past few weeks," he said in a recent report. "We expect both trends will persist."
In addition to impressive gains this year, investors who looked past the worries about the economy and stock market, and stuck with a simple investment in the Standard and Poor's 500 during the past three years, have enjoyed stock market gains of more than 62 percent.
With dividends included, it's been even better -- the market's delivered a 72.4 percent return. And for those who stuck it out going all the way back to the most nerve-wracking days of the financial crisis, the stock market has given investors gains of more than 239 percent, including dividends, since March 9, 2009, according to Howard Silverblatt, a Standard Poor's analyst. Without dividends the Standard Poor's has climbed about 201 percent.
While most hand-wringing about the economy has centered on the sorry state of the consumer, the single most successful investment has been to bet on stocks that depend on consumer discretionary spending. The stocks in that sector -- which include everything from hotels and cable companies to automakers, retailers and restaurants -- have climbed as a group about 328 percent during that same period, according to Silverblatt.
The rise was powered, in part, by factors like pent-up demand, which caused people to buy cars after keeping old models running on average for about 11 years. In addition, analysts have repeatedly figured a strengthening jobs market and improving stock and housing markets would help drive purchases.
This year, with consumer stocks pricey, those stocks have lagged most other sectors. They have climbed just 1.6 percent for the year, while nervous investors -- who have been clinging to defensive stocks in sectors like utilities and health care -- have enjoyed the greatest gains. Utility and health care stocks are up about 22 percent for the year. The biggest loser has been energy, with stocks down about 2 percent for the year, as investors worldwide have worried about a glut of oil and a decline in demand as Europe and emerging market economies have stumbled.
Consumer discretionary stocks are the priciest in the stock market, trading at about 19.9 times expected 2014 earnings, and strategist Ed Yardeni noted that the sector has delivered the most disappointing earnings. The cheapest stocks are energy companies priced at about 13 times 2014 expected earnings. The stocks have fallen as oil prices have plunged about 28 percent since June.
Pricey stocks can be set up to fall if companies don't deliver as expected. On the other hand, companies that do deliver tend to embolden investors. And investors are becoming more courageous as companies conclude their earnings reports for the third quarter.
With about 90 percent of companies done reporting, investors have focused on impressive earnings growth of 10 percent rather than companies' lackluster ability to grow sales.
In late summer and early fall, analysts slashed expectations for multinational companies as investors worried that a slump in Europe and emerging markets would impair sales by U.S. corporations into foreign markets. But Bank of America Merrill Lynch strategist Savita Subramanian said in a report to clients this week that it now looks like the negative view of profits might have gone too far.
"Almost two-thirds of companies with significant overseas sales exposure have beaten analysts' earnings expectations," she said. In a twist from earlier expectations, company executives have been the most upbeat on "globally sensitive industrials" and the most skeptical of the outlook for U.S.-oriented utility and consumer companies.
gmarksjarvis@tribune.com
Twitter @gailmarksjarvis
