If you keep an eye on your 401(k), you might be among the cheerful Americans who told researchers in a recent Conference Board consumer confidence survey that they are feeling better about the economy and their future.
Rising stocks play a role in making people feel more hopeful and wealthy, and the stock market has done its bit this year despite all the fretting about threats to the economy.
As the last quarter of this year begins, the U.S. economy remains fragile, Europe continues to battle its way through debt problems and recession, and China is weakening. But investors are enjoying 15 percent gains in the Standard & Poor's 500, a rough measure of the stock market. That's not shabby, especially given the fact that historically stocks have averaged gains of 9.8 percent for a full year. And it's remarkable given the hand-wringing about the slowest recovery since World War II during the last three years.
Of course, there are still three months left in the year, and some analysts are warning that concerns about sharp tax increases and government spending cuts late this year could destroy some of the gains. But on any level, what the stock market has done for individuals so far this year is definitely extraordinary.
The S&P 500 is up 14.9 percent, and the stocks of the world measured by the All Country World (ACWI) Ex U.S. index are up 10.2 percent. China's Shanghai index is down 5.5 percent for the year, and Spain has declined 8.5 percent. But despite Europe's debt infection and recession, the German DAX is up almost 24 percent and a French index is up 7.7 percent.
During the third quarter alone, people with mutual funds that invest in large U.S. stocks gained 8.8 percent on average. And those with money in international stock funds averaged a 10.29 percent gain, according to Morningstar.
The gains materialized as the Federal Reserve and other central banks in the world tried to lift spirits and sluggish economies by making more low-cost money available. Stocks responded to interest-rate cuts and bond buying the way they usually do amid stimulus by central bankers — they climbed.
Federal Reserve Chairman Ben Bernanke said that was one of his goals, along with making mortgages and business loans more affordable. The S&P 500 reached a new high for the year, at 1,465, after the Fed's September announcement. But it wasn't just Bernanke who influenced the market. Stocks worldwide got a lift when European Central Bank President Mario Draghi promised to do "whatever it would take" to save the eurozone. That soothed concerns about a financial disaster in Europe, although European leaders continue to bicker about potential bailouts.
Since the Bernanke and Draghi actions, stocks have retreated a little as China, Europe and the U.S. have reported weakness, with the U.S. gross domestic product growing at just 1.3 percent and exports plunging worldwide. But the S&P 500 closed Tuesday at 1,445, not far below the mark it reached after the stimulus announcements.
"While none of the problems that confronted the global economy at the start of the year have been resolved, the success of central banks in reducing the risk of disaster has made the extremely cheap valuations of stocks relative to fixed income unjustifiable," said David Kelly, chief global strategist of J.P. Morgan Funds.
In other words, although there are plenty of risks in the world, stocks became more appealing than bonds after the stimulus. U.S. Treasury bonds have been uninviting because they pay almost no interest and will plunge in value if interest rates start climbing.
Still, individuals have remained leery of stocks and many have not participated in the lofty gains bestowed this year. They have used the rallies in the stock market to pocket their gains and run. Meanwhile, institutions have been somewhat more daring and have propelled the market higher. This year, individual investors have pulled $111.4 billion out of U.S. stock funds, while institutions have added $77 billion to them, according to fund tracker EPFR Global.
Yet, even institutions have been reluctant and the stock market has climbed higher based on relatively low volume.
As he has met with clients, JP Morgan strategist Thomas Lee said he "has been struck by scarcity of bullishness. Investors remain concerned about the euro area, China, U.S. fiscal cliff and the fact that central bankers may be the 'only reason' equities are up." In addition, he says, many investors think that corporate profits for S&P 500 companies are peaking. They've noted that profit margins are weakening.
But Lee is urging investors to buy cyclical stocks such as industrial companies, which depend on a growing economy and have been neglected by investors recently.
Still, analysts such as David Kostin of Goldman Sachs are warning that the end of this year could become dicey.
He thinks investors should brace themselves for a sharp fall in the market following the presidential election, "when investors finally recognize the serious possibility that the 'fiscal cliff' problem will not be solved in a smooth fashion."
The fiscal cliff involves about $500 billion in tax increases and billions in government spending cuts that Bernanke has said could put the country in recession next year if Congress doesn't stop the automatic measures by year's end.
Still, some political observers think Congress will relieve the angst by delaying a decision until next year.