It took more than five years, but the Dow Jones Industrial Average 2 Minute (Dow Jones Indices: .DJI) has officially surpassed its previous record. The road to this new stock-market high has been a painful one, including (but not limited to) a mortgage meltdown, a collapse of the financial markets, and the threat of the U.S. economy free-falling over the fiscal cliff. Even though many investors are fearful that the market will retreat as it did the last time it hit a new high, conditions aren’t the same as they were in 2007.
Without a doubt, the Dow’s recent rise has impressed investors. The index is up roughly 115% from its March 2009 low. But a lot has changed.
Here are three reasons why that’s the case.
1. The economy is moderately improving
OK, in October 2007, the economy was growing at a stronger rate than it is today. But it was also signaling a slowdown. By comparison, there are signs today that the economy is improving. For example, we’re seeing a rebound in housing and an improvement in the jobs market. Despite recent events like payroll tax increases, spending cuts, and higher gas prices, the economy is growing at a modest clip.
2. Lower interest rates are helping the economy
Five years ago, short-term interest rates stood at roughly 4%, and the Fed promptly started cutting interest rates to stimulate economic growth. Today, those same rates are close to 0.1%. Further, long-term interest rates were higher: In late 2007, the 10-year Treasury rate stood at about 4.5% compared with 1.9% today. Depressingly, those low rates shriveled the income you receive from your CDs and bonds, but they’re helping to heal the U.S. economy. Corporations are borrowing more money to fund business operations, buy back shares, and pay out dividends.
3. Stock valuations are more attractive today
The S&P 500‘s forward price-to-earnings ratio is roughly 13.7 today. By comparison, in October 2007, this ratio was close to 15. That indicates that stocks are less expensive and appear more attractively valued these days.
For the patient, long-term investor, today’s environment of modest economic growth and solid corporate earnings hints that the stock market can continue to perform favorably.
Keep on keeping on
Despite the new market high, several stocks in attractive industries trade at juicy bargains. For example, our aging population will increasingly demand more medicine and health care treatments. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) makes and markets generic drugs in all major treatment categories from cancer to Parkinson’s disease to asthma. Near its 52-week low, the stock boasts a forward price-to-earnings ratio of seven and pays an attractive 2.8% dividend yield. And branded-drug maker Pfizer Inc. (NYSE:PFE) boasts a strong drug pipeline and ample emerging-market growth potential. The company is refocusing on its core pharmaceutical business by selling or spinning off some non-pharma divisions. Pfizer pays shareholders a hefty 3.5% dividend, and its stock trades at a forward P/E ratio of 12.
