GO
Loading...

5 reasons why the stock market is shining bright

The stock market, which looked tired and on the verge of a breakdown in early spring, is suddenly shining brightly, with key indexes such as the Dow Jones industrial average and S&P 500 sprinting to new highs on a daily basis.

Both indexes are up in early trading Friday and on track for record closes again, with the S&P 500 shooting for its 18th record close of the year. It was up 5% heading into today's trading.

"Market sentiment is improving after a harsh winter," says Kate Warne, investment strategist at Edward Jones. "Business fundamentals are OK and companies reported better-than-expected earnings in the first quarter. Investors are confident but not irrationally exuberant. And cash is coming off the sidelines and investors are putting more cash into stocks and bonds."

Traders on the floor of the New York Stock Exchange.
Reuters
Traders on the floor of the New York Stock Exchange.

More from USA Today:
First Take: More jobs but no cheer on pay gains
Kazakhstan tries raising beef to moove economy
Part quesadilla, part burrito: Taco Bell unveils the quesarito

Here are five reasons why stocks have regained their mojo.

1. The momentum stock selloff didn't spread to blue chips.

Sure, those once-high-flying momentum names in the biotech and Internet space suffered their very own bear market. But the damage never really spread to the blue-chip segment of the stock market.

In short, money didn't exit the stock market completely. Cash simply moved out of parts of the market that had gotten overly pricey after posting huge gains and into pockets perceived as more reasonably valued. At one point, the Nasdaq composite, home to many of the so-called "story" stocks that fizzled out after huge run-ups, was down more than 8% from its 2014 high, but has regained most of those losses and is down about 1% from its peak. In contrast, the S&P 500 suffered a pullback of just 4% from its record high but is on track for its 18th record close of the year Friday, after notching 45 new records in 2013.

Read More Meet poster child for momentum stock selloff

2. The frozen economy did thaw out, as hoped.

The U.S. economy went dormant this winter as heavy snow and icy roads stalled commerce. But economic data, ranging from factory orders and vehicle sales to jobs and home sales, have come in stronger as the weather turned warmer. Today's better-than-expected reading on May job growth confirmed that the economy is on the mend after a dismal winter. The economy created 217,000 new jobs last month, topping forecasts. The unemployment rate was unchanged at 6.3%, which was also better than expected. The better data is reflected in higher GDP growth projections for the second quarter, which could be in the neighborhood of 3%, up from a 1% contraction in the first three months of 2014, according to economists at Barclays.

3. The world's bankers did their part.

Fears that the major central banks would pull back on stimulus, despite a still-sluggish global economy, had some investors worried this spring. But the Janet Yellen-led Federal Reserve made it clear to Wall Street that it had no plans to start hiking short-term rates, now at record lows, prematurely. And yesterday, in an attempt to jumpstart Europe's economy, the European Central Bank did its part. It cut interest rates to record lows, announced new steps to boost bank lending and hinted that it would embark on a U.S.-style bond-buying program if needed.

"If Europe's economy picks up," says Warne, "it's a positive for the U.S. and the rest of the world."

Read MoreECB's Draghi announces host of stimulus measures

4. The Ukraine crisis didn't spiral out of control.

Talk of Cold War 2.0 has died down. The Ukraine/Russian crisis has cooled following new elections in Ukraine and a less confrontational approach from Russia.

5. The bearish warnings didn't come to fruition.

Predictions of a 1987-style crash or a big stock market downdraft have not come true. In fact, this week, hedge fund honcho David Tepper of Appaloosa Management toned down his concerns about stocks. Last month, he sounded a warning, saying that the stock market was getting dangerous and that he was getting "nervous." His fears at the time were the ECB's lack of urgency related to the eurozone's weak economy, the Ukraine crisis, U.S. growth concerns and worries about China. But yesterday, he told cable business channel CNBC that many of his main market fears have "alleviated."

Read MoreAppaloosa's Tepper: Chief market concerns have 'alleviated'

Market skeptics, of course, argue that complacency is again running high on Wall Street, which is worrisome. Citigroup, for example, says its proprietary sentiment tracker has moved further into the "euphoria" stage, which suggests investors are getting overconfident. And in another bad sign, Ned Davis Research says legal insider selling by corporate executives is on the rise, signaling that executives think their shares are fully valued.

But, for now at least, stock investors' lack of fear is translating into fatter gains.

Still, Warne's advice to investors is "be prepared" for the next market correction. "We don't want people be to be surprised if there is a correction," she says.

—By Adam Shell, USA Today

Symbol
Price
 
Change
%Change
DJIA
---
S&P 500
---
NASDAQ
---

Contact US

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More