The U.S. stock market closed at a record high Tuesday, cementing the biggest yearly gains in more than a decade as investors clung to signs the economy is improving.
The Dow Jones industrial average closed up slightly Tuesday, and gained 26.5 percent for the year — its best returns since 1995. The Standard & Poor’s 500-stock index, a broader gauge of stock activity, climbed 29.6 percent, its highest showing since 1997. The tech-heavy Nasdaq gained a startling 40 percent.
“Investors had anxiety fatigue,” said Ed Yardeni, chief investment strategist for Yardeni Research. “They were tired of being scared and anxious.”
Since the 2008 financial crisis unfolded, investors have had much to worry about. A repeat of the financial crisis. The disintegration of the euro zone. Unsustainable growth in China. The possibility of a double-dip recession in the United States and the looming “fiscal cliff.”
But the start of 2013 brought relief. Lawmakers struck a deal to avert the fiscal cliff. The U.S. economy kept muddling along, as did the euro zone. Soon, Washington’s political antics, including a stand-off over the debt ceiling, were just background noise for investors.
And there was the Federal Reserve. Through its massive stimulus program, the Fed kept buying billions of dollars worth of bonds to drive down long-term interest rates, lowering the cost of borrowing money and encouraging people to take on riskier assets, such as stocks.
“The very low interest rates greased the treads,” said Sam Stoval, chief equity strategist at S&P Capital IQ. “Low interest rates give investors and businesses reason to borrow, and that helps stoke the economy and push up earnings.”
Strong corporate earnings in turn boosted the stock market, which became far more attractive than the bond market, where investors had been “hiding” their money for a few years, said Mike Larson, an analyst at Weiss Research in Jupiter, Fla.
Larson estimates that $1.4 trillion flowed into bonds and other relatively safe investments from 2009 through 2012, even though the stock market was rising. Money flowed out of those investments in the past year.
“Investors were shell-shocked in the wake of the credit crisis and the recession, when they lost money,” Larson said. “But this year, Americans started coming out of the foxhole. Money that has been hiding for several years in bonds is rotating back into stocks.”
The gains have not been concentrated in a single sector, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. In the S&P 500, the stocks of 457 companies were up as of Tuesday, Silverblatt said. “Picking a loser this year was not an easy thing to do,” he said.
Analysts expect plenty more money to enter the stock market in 2014, but that also worries them. As time passes, the lessons of the 2008 crisis may fade, Yardeni said. The stock market might heat up too quickly, and the economy expand too quickly, which could lead to another market bubble.
“My biggest concern is that all our wishes come true in 2014,” Yardeni said. “Too much of a good thing too fast is not a good thing.”