There is a simple explanation behind the stock market boom that is pushing the Dow over 13,000 into record territory—profits are high and interest rates are low. These are the two main drivers for stock market value. When you combine them into capitalized profits (using the 10-year Treasury to discount earnings) what you find is this:
From the bottom, capitalized profits have increased 197 percent. But stocks have increased by roughly 90-100 percent. Therefore stocks have value. Stocks are cheap. Add to the mix a strong dose of record low tax rates on investment capital.
Barring some terrible outside shock, the market can keep rising.
It’s Goldilocks.
Stocks are still the greatest story never told.
