U.S. stocks are resuming a steady climb amid humdrum economic recovery

U.S. stocks are resuming a steady climb amid humdrum economic recovery
Economists said the slight increase in third-quarter borrowing for auto and student loans and credit card balances was an indication that households felt more comfortable taking on credit to fund current consumption. Above, tourists enjoy the atmosphere in Times Square in New York in October. (Jewel Samad, AFP/Getty Images)

Stagnant wages. Slow economic growth. Stubborn unemployment. Economists call the prevailing gray economic landscape the new normal. Wall Street has another name for it: "Good times."

Having shaken off a momentary scare in October over fears that included European economic stagnation and the Ebola virus, U.S. stock market indexes have resumed a gradual but steady march upward toward record levels, riding an American economic recovery that is neither too faint nor, for investors, too robust.


Stocks have adjusted to the new normal quite nicely, analysts said, and trading is rounding out the year in something of a sweet spot.

The humdrum recovery, even with better-than-expected revised growth for the third quarter, still isn't enough to excite inflation fears. That leaves the Federal Reserve free to pursue its go-slow approach to raising the all-important federal funds rate, which has been near zero since 2008 to stimulate the economy.

Low wage growth, while dampening demand, and low borrowing rates have helped corporations control their two biggest costs. Corporate net income rose 3.2% in the third quarter from the prior three-month period after rising 8.6% in the second, according to data compiler Factset Research Systems Inc.

"You've got a lot of things going right," said Russ Koesterich, global chief strategist for investment giant Blackrock Inc. "If you're a corporation now, this is nirvana."

The case for the U.S. economy got a boost when the Commerce Department reported that the economy expanded 3.9%, annualized, in the third quarter, unexpectedly better than the 3.5% annual rate that the government had reported in its first estimate last month. The upward revision surprised economists who were expecting 3.3% growth.

The New York Federal Reserve Bank on Tuesday essentially declared the end of the painful process of consumer deleveraging that had been underway since the 2008 financial crisis.

In its quarterly report on household debt, the regional regulator said outstanding household debt edged slightly higher in the third quarter, rising $78 billion. Even so, the $11.7 trillion in total household indebtedness remains nearly $1 trillion off its 2008 peaks.

New York Fed economists said the slight increase in borrowing for auto and student loans and credit card balances was an indication that households felt more comfortable taking on credit to fund current consumption.

"In light of these data, it appears that the deleveraging period has come to an end," said Wilbert van der Klaauw, senior vice president and economist at the New York Fed in a news release.

Liz Ann Sonders, chief investment strategist at Schwab, noted that the household debt level as a percentage of personal income — a key metric — has been falling rapidly and now is well below long-term trend levels. She said the muted recovery is keeping monetary policy from tightening.

"The market does not like booming economies," Sonders said. "It's a Goldilocks kind of environment."

Although the economy has been gaining momentum, income growth has remained tepid, rising 0.2% in October, according to the Commerce Department, slower than in previous months and below economists' forecasts.

The markets closed Friday with a shrug: The broad Standard & Poor's 500 index lost 5.27 points, or 0.3%, to 2,067.56, while the blue-chip Dow Jones industrial average gained 0.49 point to 17,828.24.

Still, those figures represent near-record highs for both indexes. For the year, the S&P 500 is up about  12% and the Dow is up about 8% — both respectable and, analysts said, in line with what investors can expect going forward.


Another pillar holding up U.S. stocks for the moment is that a moderately promising American economic story looks even better compared with the rest of the world.

This month, the European Union cut its economic growth forecasts for the region, citing geopolitical risks in Ukraine and the Middle East.

The economy in the 18-nation Eurozone, the area that uses the euro currency, is forecast to expand just 0.8% this year and 1.1% next year, according to the European Commission, the region's executive body. Those figures are down from spring forecasts of 1.2% growth this year and 1.7% next year.

Japan unexpectedly toppled into recession in the third quarter, contracting at a 1.6% annual rate; economists pinned much of the blame on a sales tax hike, since postponed. China, meanwhile, has seen its growth rate slow with falling prices in its property markets.

"The U.S. is likely to be the lone bastion of growth within the global economy," said Matt Whitbread, an investment manager for Barings Asset Management.

Finally, the outlook for bonds turned less rosy after the Federal Reserve brought down the curtain on its massive post-crisis bond-buying program, one of two extraordinary steps taken to reinvigorate the economy.

The Fed now is considering when to raise short-term interest rates — the other step — from the current level, near zero. Higher rates are likely to hurt bond prices and drag down returns.

To be sure, to say the U.S. stock market is the venue of choice for the moment is not to say there aren't plenty of risks. Koesterich and others see plenty of trouble resulting if wages remain stuck in neutral for too much longer. After all, consumption drives much of the U.S. economy, and real income growth pushes up consumer spending.

Stocks have recovered from the October pullback that dropped some indexes nearly 10%, and now they aren't cheap. The S&P 500 is trading around 17 times last year's earnings, which is historically on the high side, though analysts said there still may be room for higher levels.

Meantime, markets in Germany and other European nations, as well as in Japan, have posted strong gains in the last month on expectations that authorities will ramp up already aggressive stimulus measures in the face of economic weakness.

The U.S. no longer faces that kind of drama — just the new normal. And as far as the markets are concerned lately, the new normal is just fine.

Twitter: @deanstarkman