We are currently in the midst of one of the longest bull markets in history. If this continues, the period of sustained growth that began in 2009 may very well be the longest ever. The S&P 500 (SPX), which many investors use as a gauge for the performance of the broader U.S. equity market, seems to reach new highs every day. The market’s growth has persisted with few meaningful corrections. In fact, the SPX is up nearly 200% from February 2009 lows. It’s a big deal.
What are the factors driving this growth? The question is incredibly complex, and doesn’t have a silver bullet answer. However, there are some interconnected concepts that many believe have spurred this growth, including:

1. Interest Rates Have Been at Record Lows for a Decade. Money Is Cheap.

In addition to nearly all other developed Central Banks, the Fed has expanded the money supply, dramatically cut interest rates, and kept them at historic lows for the better part of a decade. This is unprecedented in modern history. The FRB took these steps as part of its dual mandate to spur growth in the American economy, and it’s been pretty controversial. Many disagree about the advisability, success and long term implications of these “loose” monetary policies, but one thing is undeniably true – money is cheap, very cheap. With low interest rates, banks are encouraged to lend. Corporations find it attractive to borrow because they can do so with low rates. Individuals are not incentivized to save because cash itself provides little to no return. In order to put their money to work, many investors have turned to U.S. Equities.

2. Investors Have Shifted From Bonds to Equities to Find Income and Yield in This Low-Interest Rate Environment.

U.S. Equities appear attractive as they not only offer growth and capital appreciation, but also income opportunities. Typically, investors looked for coupon (income) payments from fixed income instruments (like government or investment grade corporate bonds). The reality is that those instruments are currently providing very low yields. In fact, the dividend yield on the S&P 500 has exceeded the 10-year U.S.Treasury yield for most of 2016. The most recent quarterly dividend level of S&P 500 companies was the highest since 1940. In a somewhat bizarre twist, some investors have been looking to equities for certain qualities that are bond-like in nature.

A number of factors, including high dividend yields and Fed policy, have seemingly led investors to ignore the fact that U.S. publicly traded companies have recently reported decreases in their earnings. Following strong growth since 2009, the S&P 500 companies showed a blended decline of -3.2% in the Q2 earnings report. This marked the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since 2008. Despite this trend, market gains (S&P 500 YTD 6.34%) and persistent high valuations continue.

3. U.S. Corporations Are Using Free Cash and Even Borrowing Money to Repurchase Their Own Securities.

In a very low interest rate environment, companies have been more willing to engage in buyback programs. They’re even willing to issue debt at these low rates in order to do so. This has the practical and advantageous implications of reducing the amount of shares outstanding and, therefore, increasing the earnings per share of their stock (and the dividend yield). In fact, S&P 500 companies have repurchased $2.7 trillion in shares during the last six years. Companies themselves have been major buyers in the market and this purchasing activity also supports price levels.

All of these factors have combined to drive the growth of the the US Equity market. Although there are inherent risks, the long term performance of US equities is clear and strong. If you believe in the future growth prospects of large capitalization US stocks, consider investing in “Blue Chips” with Stash. And if dividend income is something that is attractive to you, take a look at “Delicious Dividends.”

Source:  Investopedia