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First half of 2017 is the strongest U.S. stock markets have seen in years

(Richard Drew/AP)
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U.S. stock markets finished the first half of the year on a strong note, raising some questions about whether the rally has enough fuel to last through the second half of 2017.

The Dow Jones industrial average and Standard & Poor’s 500-stock index each gained 8 percent in the first six months of the year. The tech-heavy Nasdaq is up 14 percent this year. The S&P 500 had its best start since 2013. For the Nasdaq, it marked the strongest first half of the year since 2009.

The rally was initially sparked by expectations that the Trump administration would deliver sweeping policy changes affecting corporate taxes and infrastructure spending, investment managers say. But as the prospects for those initiatives have dwindled, the gains have continued as new signs emerge that companies are making more money and that U.S. consumers are feeling confident about their finances.

Stocks also have been lifted by the sense that other global economies, particularly in Europe, are starting to stabilize, said Jamie Cox, managing partner for Harris Financial Group, a wealth management firm in Richmond.

The robust start to the year stands in sharp contrast to the early 2016, when domestic stock markets sold off amid worries about how the U.S. economy could be affected by a slowdown in China and Europe. But this year, improvements in other parts of the globe are putting investors at ease, Cox said.

It also helps that U.S. job growth has been steady and that consumers are feeling better about their ability to pay the bills, take trips and cover other expenses, Cox said. Consumer confidence rose in June from the previous month, according to the Conference Board, a business research group. “The conditions are pretty good for economic growth to continue,” Cox said.

Companies also continue to benefit from low interest rates. While the Federal Reserve has raised its benchmark interest rate twice this year, rates on long-term bonds are still low. That means companies are still able to borrow money inexpensively, he said. Those low payouts for bonds also make it unlikely that investors will ditch stocks for bonds anytime soon, said Brad McMillan, chief investment officer for Commonwealth Financial Network, an investment firm based in Waltham, Mass.

Not all stocks have been rising, however. The S&P 500 telecommunications sector, which includes phone and Internet providers such as AT&T and Verizon, is down nearly 13 percent for the year. The energy sector, including oil and gas companies, is down about 14 percent this year amid low oil prices.

Financial stocks got a boost in June after all 34 of the nation’s largest banks passed the stress tests from the Federal Reserve. The news that most banks are planning to return billions in cash to investors by raising dividends or buying back shares pushed bank stocks higher. Financial stocks are up 6 percent this year. Information-technology stocks are up 16 percent, more than any other sector in the S&P 500.

Stocks overall are being lifted higher by better-than-expected earnings growth. After the first quarter, companies showed that they have cash on hand, said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. But as stock prices have climbed, investors will want to see that companies are also able to bring in more revenue, he added.

The broader market rally will face a test in a few weeks, however, when companies start to report second-quarter earnings, Silverblatt said. Stock markets have reached records over the past couple of months, raising concerns about whether some stocks are overpriced, he said.

If earnings reports exceed expectations, that could provide more fuel to the rally. But if corporations disappoint, some investors may start to feel like today’s high stock prices are not justified.

“We know things are going to get better, but we need to see that better is coming,” Silverblatt said. “Everyone is expecting it.”