6 reasons stocks are still setting records

Despite a shaky economic recovery, the markets are seeing a boost from low interest rates and a shrinking deficit.

By MSN Money Partner Jun 27, 2014 2:05PM
Image: Arrow Up © Comstock Select/CorbisBy William Watts, MarketWatch

Stocks continued to grind out record high after record high in the second quarter. 

Low interest rates, low inflation and steady growth are often cited by market bulls as the fundamental tailwind for the market even as they acknowledge that valuations are getting a bit stretched.

In a note, David Kotok of Cumberland Advisors says it might be time to up cash holdings in the face of geopolitical risk, but offers a concise list of reasons why stocks continued to rally in the second quarter and still look attractive compared to other asset classes:

1. The short-term interest rate remains close to zero.

2. Long-term government bond rates fell when they were expected to rise worldwide.

3. Reports of worldwide inflation continued at very low levels in most jurisdictions. In Europe, the inflation rate is now recorded at 0.50 percent.

4. Central bank policies continue to be expansive. Even though the Federal Reserve is tapering, it is still expanding excess reserves and acquiring assets onto its balance sheet.

5. The federal deficit continues to shrink. It has gone from a run rate of $1.4 trillion at its peak to an annualized run rate of $400 billion, and the number is falling.

6. The growing U.S. energy self-sufficiency is evolving and is resulting in shrinking trade and current-account deficits. We do not import as much oil and energy as we used to. We produce much more. The trends continue in that direction. That means that dollars do not flow abroad; therefore, those dollars do not have to be attracted back to the U.S. by higher interest rates or other investment returns.

Those factors continue to support equity prices, Kotok writes, and on a comparative and relative basis, stocks "still seem attractive." He expects slow growth and low inflation to continue to support U.S. earnings growth.


That said, he notes that while Cumberland was fully invested for most of the quarter, geopolitical risk is on the rise. "To be more prudent, we have raised some cash reserve during the second half of June," he said.

More from MarketWatch

Jun 27, 2014 2:29PM
Well here's the problem, seems some folks don't realize there's the economy for one side, the top 1%, and then there's the Economy left over for everyone else. Near Zero Borrowing Costs are reserved for the select few while usury rates across the Board have never been HIGHER. We are producing the Most Crude in Two Decades yet we are exporting instead of attending to our own needs.

Inflation is Rampant and anyone living in the Real World knows this all too well. Concerning the near term levels of Deficits, that's about to change again an in a Huge way. Stocks continue to rise simply because Corporations are borrowing at Record Levels to engage in Record Levels of Corporate Buybacks. Global Debt has soared 40% since the Great Recession. The Current State of Things is simply unsustainable. The Longer it takes for Reality to take hold, the Harder and Deeper the Fall.

Jun 27, 2014 2:29PM
5. The federal deficit continues to shrink. It has gone from a run rate of $1.4 trillion at its peak to an annualized run rate of $400 billion, and the number is falling.---- That would be the Federal budget not the National Debt... Nothing is getting that down....
Jun 27, 2014 3:55PM
From the article:  "Low interest rates, low inflation and steady growth are often cited by market bulls as the fundamental tailwind for the market . . ."

Errrrrrrrr . . . US GDP for the first quarter of 2014 was revised earlier this week to be -2.9%.  In what universe is a declining GDP evidence of "growth"?  Inquiring minds want to know.
Jun 27, 2014 2:25PM
90% of it is the lower demand yields the current interest rates have created.
Jun 27, 2014 4:01PM
"Shrinking deficit"?????? "Economic recovery"???????????????
Jun 27, 2014 5:01PM
CNN is reporting that a Mexican chopper flew into the USA about a hundred yards and fired off some rounds close to some of our border agents. We should demand our marine back or the occupants of the chopper to jail.........
Jun 27, 2014 4:01PM
The deficit is one thing.  What about the debt the Fed and our dear leader have incurred in the trillions?  And, this fall we will see the true cost of Obamacare when the new premiums come out.  We have been in a tailspin downward since Obama has taken office and it is only going to get worse before it gets any better.
Jun 27, 2014 5:07PM
Strongly disagree with the low inflation assertion.  Figures cited are heavily manipulated (excluding food & fuel...really?).  Asset price appreciation largely due to the Fed's policy of monetizing Federal debt (read: printing money to buy bonds).
Jun 27, 2014 2:38PM

You cannot beat FREE     $$$$$$$$$$$$$$$$$$$$$ 
Jun 27, 2014 10:24PM
Let's see, #1 - Fed's still printing, #2 Fed's still holding rates down,  #3 Banks are still not paying interest, #4 Retirees need income, #5 Inflation is still low, #6 US economy is way below full utilization.
Jun 27, 2014 5:46PM

Q-E isn't dead yet but will be and should never have been done. The GDP shrank in the first Q 3% and once again we're being told not to worry better times are "just around the corner". If you're beginning to feel a little bit like we're chasing our tails, well in fact that's just what we're doing. The economy hasn't emerged from recession at all and isn't going to as long as anti-growth policies are in place.

We cannot have a thriving and robust economy while we have millions of able bodied people sidelined and not working. Even Janet Yellen herself has stressed the need to get more people back into the workforce. Why the MSN staff writers wish to ignore this horrible fact is beyond me.

Jun 27, 2014 3:46PM
Stupid sheep
Irrational Exuberance
Lack of Understanding
Liberal Nuts
Because obo says things are improving (see #1)
Jun 27, 2014 3:05PM
All thta funny money obama pumped into the economy to buy himself some time.  He is a clueless magician!
Jun 27, 2014 5:38PM
$1,000,000.00  Reward to turn over the lost e-mails from Lerner. THE GEEKS WILL BE OUT OF THE BASEMENT  ON THIS ONE

It's gonna hit the fan soon.  And don't be so shocked when one of those communications  has a WHITE HOUSE URL ON IT
Jun 28, 2014 3:00PM
I didn't know we were so well off!
Jun 29, 2014 2:48PM

Utter Nonsense.  Since the end of the "sequester" the beficit is growing by leaps and bounds.   Source:  Barrons, 6/23/14, page M50.  The deficit in May was 1.453 Trillion, last year 1.056 Trillion.  You will not hear the Liberals and Democrats mentioning the deficit is going down, because FACTS indicate the exact opposite.  We are target to exceed 18 trillion in debt before the year is out.  This in spite of the massive Obama tax increases.   Federal spending has also increased above what the tax increases brought in.

What we need is a balanced budget all right.  But that means we have to get the 47% parasitic class that pays no taxes to contribute their FAIR and EQUAL share.  Instead we get more massive spending, and ZERO cuts.  We need to slash the Federal budget by one third.  We have a lazy, LYING, arrogant, CORRUPT Imbecile running the country in '57 states' Obama. 

Jun 27, 2014 3:12PM
Obama rips GOP in election-year economic salvo:  Please go pound sand up your behind, you socialist mushlum POS hater of what made America great.
Jun 28, 2014 1:51PM

No one talks about basic economics and the law of supply and demand. Retirement plans of all types +IRAs +Roth IRAs represent a constant flow of money into the market and represent a platform for demand ON THE BUY SIDE.  I don't know how big a factor it is, but it seems to always be discounted by 'The Talking Heads/The Experts' and they have not gotten it right - the market, the economy, GNP forecasts, employment or the lack thereof, and the overall quality/pay of new jobs. The optimism of the experts is a bit overwhelming especially since they are so far removed from the men and women trying to make a difference.  

Jun 28, 2014 11:47AM
5. The federal deficit continues to shrink. It has gone from a run rate of $1.4 trillion at its peak to an annualized run rate of $400 billion, and the number is falling.----- That would be the federal budget deficit continues to go down but we are still spending more than we take in yearly. That is not the National Debt, we are adding less to the National Debt, but we are having to pay interest on the debt and the debt is not going down but UP.  Whoever writes these articles use your adjectives and understand what you are writing, cut and paste does not cut it.... ha
Jun 28, 2014 12:23AM
The title of this article says,"a shrinking deficit".....now please go visit "usdebtclockorg" and tell me if anything is shrinking.
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