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What Does it Mean When Stocks Gain $3.7 Trillion in a Single Year?

dailyreckoning.com.au / By Bill Bonner / January 3rd, 2014

So what’s ahead for 2014? We don’t know…but we know what most people think they know is not so.

Most people think 2014 will be a ‘return to normal’. Don’t count on it.

Whatever happens, it will be hard for the stock market to match 2013. During the last 12 months the S&P 500 gained an astounding $3.7 trillion.

To put this in perspective, the S&P lost 1% a year from 2000 to 2009. Then, with the Fed’s jet engine behind them, stocks took off…bringing the total return to 3.6% a year. Still not great. But a lot better.

But what does it mean when stocks gain $3.7 trillion in a single year? The underlying companies couldn’t possibly have changed in any fundamental way.

Most likely, they are the same now as they were at the start of the year — run by the same people, doing the same business, making the same sales. So, why are they worth so much more?

Profits are higher – in no small part because the Fed’s ZIRP has made it possible to borrow cheaply. Companies used the cheap credit to do two important things:

1) Refinance expensive debt, lowering interest expenses and thereby pushing
up net profit margins

2) Buy back their own shares, raising their share prices

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