By Dave Goodboy
The stock market has outperformed even the most optimistic forecasts so far this year. The S&P 500 and the Dow Jones Industrial Average are up nearly 10% in just the first six weeks of 2013.
While not an unprecedented bullish move, it is certainly impressive. And begs the question, how much higher can stocks go from current levels?
While there is little doubt that the recent bullish momentum is fueled by the easy money policy of the Federal Reserve, I think there are solid underlying factors that could support stock prices at even higher levels.
Here are nine bullish pillars supporting the stock market:
1. Economic data is improving
The Institute for Supply Management recently reported its index of manufacturing activity climbed to 53.1 in January, an improvement from the December reading of 50.2. Readings above 50 indicate there is economic expansion.
In addition, employers added 157,000 jobs in January, not to mention the fact that hourly earnings increased slightly and growth was evident in construction and retail jobs.
2. Money is pouring in the stock market
Money flow is what controls the stock market. In January, investors flooded stocks with nearly $21 billion of new money. This is the largest amount of capital in a four-week period since April 2000, according to financial intelligence firm Lipper Analytics.
What I find most bullish about this scenario is that $410 billion outflowed from stocks since January 2008. This means there is tremendous additional capital just waiting for the right time to be redeployed into stocks. Just imagine the upside that the missing $390 billion could fuel into the stock market when it finds its way back home.
U.S. stocks have been in an aggressive bull market since March 2009. Overall, the U.S. stock market has booked gains of nearly 130% through the end of 2012, and this isn't even counting the solid performance so far this year.
Looking at the global picture, U.S. stocks have outperformed Japanese stocks by 97%, European stocks by 24% and emerging-market equities by 22% during the same period. U.S. stocks also crushed the 18% return of 10-Year Treasury notes during this time. These same notes, on the other hand, outperformed the 14% overall return for bond markets in global developed economies.
4. Safety in size
Just like the gravitational pull of the sun holds the most attraction for objects in space, large economies attract the most capital and resources. The U.S. economy is worth nearly $16 trillion, making it the world's largest and wealthiest. It is also twice the size of the next largest economy, China, more than twice the size of Japan and nearly five times the size of the German economy. In times of global economic troubles, the U.S. economy still serves as a beacon of safety within the storm.
5. Natural resources
Natural resources are the basic fuels of economic growth. Except for Russia, the United States boasts more natural resources than any other country on Earth when calculated on a per-capita basis. The country has more than five times more arable land and more than four times more water resources than the next largest economy, China.
6. Global "brain power"
Because of great living conditions, nearly 40% of U.S. researchers migrated to the United States from other nations. Being the home of this "global brain power" can only strengthen the U.S. economy as these scientists and researchers optimize current systems, solve problems and help develop a more sustainable future.
7. Military strength
Protecting the U.S. economy from hostile political actions is the world's largest military. The $700 billion spent on defense is greater than the next 13 countries combined. A strong military increases the sense of stability in the society and the economy, creating a safe-haven for global investors to trust U.S. stocks.
8. Energy dominance
Many investors don't know, but the United States could soon be the world's largest energy producer. Thanks to new extraction techniques, the country is on its way to be the world's No.1 oil producer by 2020, the International Energy Agency recently reported. The economy is well on its way from decoupling itself from the volatile Middle East for energy needs.
9. The reversal of outsourcing
Large U.S. companies such as General Electric (NYSE: GE) and Caterpillar (NYSE: CAT) among others have revealed plans to shift production back to U.S. soil from international locations. This is due to cheaper energy and other government incentives to bring manufacturing back to the United States. The reversal of outsourcing could add up to 5 million jobs and as much as $55 billion to the domestic economy by 2020, according to Boston Consulting Group.
Risks to Consider: Looking at the technical picture of the Dow Jones Industrial Average, upside resistance has been hit in the 14,000 range. This resistance forms a gigantic double top on the monthly chart. This signals a very likely short-term pull back in the stock market.
I remain very bullish on the stock market this year. I expect a short-term pull back, however the improving economy combined with the easy money policy of the Fed will likely keep fueling the stock market higher in 2013. The Dow could easily close the year in the 15,000 range.