Both the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI) and the S&P 500 (INDEXSP:.INX) finished March at new all-time record highs. But with the first quarter of 2013 in the record books, the question investors need to ask is what will keep the bull market in stocks alive going forward.
Three key contributors have helped push the Dow to new highs, and they’re poised to keep supporting the market. Let’s take a closer look.
1. Interest rates will stay low.
Low interest rates have been the lifeblood of the bull market over the past four years. As much as lower rates have hurt savers, they have given corporations a chance to refinance debt and obtain more capital very inexpensively. Highly rated blue-chip stock Microsoft Corporation (NASDAQ:MSFT) tapped the bond market last November, finding investors willing to allow it to borrow money for five years at a rate of less than 1%. Less creditworthy companies haven’t gotten rates that low, but they’ve nevertheless been able to refinance existing debt at lower rates than they were paying before.
Low interest rates have already had the effect of cutting interest expense, helping profitability and boosting margins. Although yields have perked up a bit lately, concerns about the global economy should lead the Federal Reserve to keep monetary policy easy for a while yet. That will give companies some chances to extend their cheap borrowing and keep the earnings that have helped push their stock prices up.
2. Dividends will keep increasing.
More than anything these days, investors appreciate income. The consequence of low interest rates is that investors have increasingly looked to stocks to provide the income that bonds, bank CDs, and other traditional income investments haven’t delivered lately.
So far this year, a number of Dow stocks have raised their dividends, and if past patterns hold true, then consumer giants The Procter & Gamble Company (NYSE:PG) and Johnson & Johnson (NYSE:JNJ) should come through with dividend increases of their own in the next month or two. Similar increases have happened with thousands of stocks throughout the market over the past year, and all indications are for those gains to continue. If they do, then it will support the market’s moves to new records.
3. Investors will chase performance.
Historically, most ordinary investors have bad timing with their investment decisions. Millions of investors got out of stocks only after the worst of the financial crisis had hit, suffering big losses but missing out on the subsequent rebound. Only now are they starting to come back into the market, seeing record highs as an all-clear sign that it’s safe to buy stocks again.