The 5 Things That Will Drive Stocks Higher

As some stock market indexes hit new highs nearly every day, more experts on stock prices and economists argue about what will allow the trend to continue and what will cause a large correction. Several trends almost certainly will press the prices of individual stocks, and the market as a whole, upward for months. The most important are:

1. Declining unemployment. The debate about this trend has two sides. The first is that overall unemployment rates have a major effect on the economy. The national rate in August was 6.1%, down from 10.0% in October 2009. However, several demographic groups still suffer much higher unemployment. And real household income has not been aided much by the jobless trend.

2. Strong GDP improvement. This rate has moved above 3% in some quarters and ticked toward 4%. Such a sharp improvement in gross domestic product was not expected in many quarters. For example, the CBO projection for long-term GDP improvement has not been as strong. Also, GDP is not a pure measure of expansion, as it can be affected by factors such as inventory buildup.

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3. Earnings. The overall effect of this was evident as many public companies announced second-quarter results. Many large companies beat estimates, and forecasts for the third quarter and the balance of the year were also above expectations in many cases. This trend may well continue into 2015.

4. Geopolitical activity. Risk of war and other signs of instability, particularly in large countries and those that produce key components for economic steadiness — especially oil — have driven markets up and down, despite the overall trend of them going higher. In particular, severe friction in Ukraine and parts of the Middle East has raised red flags. If military conflicts in these areas become much more severe, so will anxiety about larger international incidents and crude production.

5. Interest rates. For the time being, the Federal Reserve has signaled it will not raise interest rates, in the name of keeping the economy relatively strong and helping unemployment. However, several members of the Board of Governors and regional presidents have argued that rates need to rise soon to keep the economy from overheating and risking inflation.

On balance, the upward pressure on the markets is strong. But it would not take a huge shift in trends to press the markets the other direction.

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