What's The Stock Market Done Lately?

Thus far in 2012, U.S. stocks have performed well. Through August 8th, the S&P 500 is up 12.9 percent. Smaller-cap indices and foreign stock indices have shown lesser gains, but are still up 10 percent and 4 percent, respectively. If the year ended with these returns, most investors would be very happy. Yet, investors don’t feel happy because the market's constant volatility has taken away any confidence that a positive market trend can be sustained.

Global Issues

Today's positive stock market gains experienced around the world have come while investors have been concerned with the following global issues:

-Europe's sovereign debt crisis
-The U.S. Fiscal Cliff – expiring tax cuts and enforced budget cuts beginning in 2013
-November elections in the U.S., as well as other foreign elections
-Slowing growth in emerging market economies, most notably China

With the exception of a slowing China, each of these issues was prevalent at the beginning of the year. And, it is likely that each of these issues will continue to take center stage and are months from potentially being resolved.

So with all of the "doom and gloom" continuing to be spewed regarding each of these global concerns, why have stocks appreciated in value?

What is Driving Returns?

With the benefit of hindsight, we will likely discover that the answer revolves around a myriad of reasons. From a speculative viewpoint, we might find the answer by identifying the source, or a common theme, of the global issues, and then looking at what might not be contributing to the issues. A Chinese philosopher would better explain this by finding the "yin" and then looking at the "yang." The "yin and yang" is used to describe the interdependency of forces that initially appear to be contrary or polar opposites. This is similar to a common adage that says it can be more important to pay attention to what was not said, rather than focusing on what was said.

It can be argued that the four global issues identified above have one common theme: government. If we could take away the problems and concerns created by the global governments, our stock market would be less volatile, and investors would feel more confident. If we take away the impact of government, we would be left to focus on the two remaining players that are getting stronger: consumers and businesses.

Consumers appear to be adapting to their new reality. Household balance sheets are getting healthier and unemployment is mostly improving, though perhaps begrudgingly. In addition, the latest mortgage refinancing boom will free up extra cash for consumers that will either stimulate the economy now or be saved to stimulate the economy later. Consumer spending has a positive and significant impact on our stock market.

Overall, businesses have never been stronger. Combined earnings for the S&P 500 companies over the past year are at an all-time high. Our U.S. corporations are managing well in this slow economy. They have neither expanded their operations nor started to rehire, but they have accumulated a lot of cash and most have had ample opportunities to refinance their debt or issue new debt at very low interest rates. Their corporate balance sheets are strong and the companies are ready to expand when the time is right.

Of course, the earlier comment "when we take away the government" is ignoring reality. We cannot simply ignore the impact of the actions of the U.S. or other governments. Worldwide, elected officials will make decisions that will have long-term impacts on consumers and businesses. Frankly, some of these decisions might prove to be very worrisome. For example, if the coming Fiscal Cliff is ignored, the combined effect of the tax increases and the budget cuts is certain to push the U.S. economy into a recession.

Lesson Learned

Still, there is a lesson to be learned here. Investors will often confront significant issues when making investment decisions. The issues change over time, but this "wall of worry" is usually present in one form or another. History has shown that investing during these times is much more profitable than waiting for these worries to subside and then choosing to invest. By that time, most of the profits will have been made.

This article was contributed by Bill Wendling, CFA, an Investment Manager at Bedel Financial Consulting, Inc.

Elaine E. Bedel, CFP, is president of Bedel Financial Consulting, Inc., a wealth management firm providing fee-only financial planning and investment management services for individuals, consulting services for corporate retirement plans, and investment advisory for institutions and endowments. She is the author of "Advice You Never Asked For…But wished you had!" available on Amazon.com. For more information, visit their website at www.BedelFinancial.com or email to ebedel@bedelfinancial.com.