Friday, January 25, 2013

Why the stock market rallies despite worries

The fiscal cliff, tax increases, missed earnings -- investors certainly have had much to worry about in recent months.  

So why, in spite of these fears, has the market continued to rally?  There's a Wall Street bromide that succinctly answers this question: "Bull markets climb a wall of worry."  Fear tends to fuel higher prices when internal momentum is rising due to short covering and other technical factors.  It's normally not until everyone has entered the market that the market finally tops out.

Many are wondering why the market has been so strong in the face of all these potential pitfalls.    The best answer I've heard for this question to date is that the U.S. stock market is the "best horse at the glue factory" so to speak.

As one newsletter writer pointed out, "Pension plans get contributions every month and have to invest them.  Individuals are saving money and they have to invest it.  And high yielding bonds and CD's from yesteryear are maturing.  What are your investment options?"  Certainly not low-yielding CD's and Treasuries.  

Moreover, the dividend yield on the Dow was recently as high as 2.6%, well about the yield on a  10-year T-Bill.  In other words, the U.S. stock market is winning the race for investors' dollars by default.  

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