Stock market trend continues positive

These past few weeks have done a fine job of reinforcing the effective impossibility of short-term market predicting.

From Christmas through Groundhog Day on 2 Feb, we had a market drop of over 5%. Corrections are a normal part of investing in the stock market and volatility – a hallmark of bull markets, as you may recall – continues high. This little drop, along with all the daily flipping about since the start of the year, may have contributed to most of the commentary about market direction again defaulting to the usual negative bias of the past six years.

Lost in all the “commentary” is the fact that net changes since year-end, up or down, have been minimal across the board. What about oil with all its recent big daily jumps? Well, when comparing Friday’s close with its year-end price, Friday’s was lower by only 84 cents per barrel. Perhaps further evidence of a settling in the crude price?

The proverbial good news is that stock prices don’t seem to be paying attention to the negative comments. The S&P500 set another new all-time high Friday. The Dow came within about 35 points of closing at a new high. And the NASDAQ, the one major stock indicator that still hasn’t passed its former all-time set in March, 2000, climbed to its best close since that high point.

Time in v. time out

It’s reacting to situations like these that can really affect your overall results. The reason is that periods of high volatility and corrections, along with the negative emotions that can be created by them, make many investors want to bail out of their strategy…thinking that they’ll “avoid losses” by doing so. Well, the truth is they often will avoid gains at the same time.

JPMorgan Asset Management released a study showing what happens to an investor’s return when missing just a few of the market’s best days which, believe it or not, tend to come very close to the single worst days. Their study covered the S&P500 from 1993 through 2013.
Their results showed that by staying invested through the entire period, investors would have realized a 9.2% annualized return. Unfortunately, had an investor been out for whatever reason on only the ten best days, the results drop all the way down to 5.4%…

This is often the main reason why buy and hold is said not to work…most don’t hold. Emotions get in the way. Try to recall that time in the market is what’s important to realizing your investing goals – not the timing of said market.

Stocks still look good here

Here are some comments from others to help support my view.

J.C. Parets, a technical analyst – chart and graphs guy – with Eagle Bay Capital said this past week that, “I have not been this bullish in a long, long time. I still like stocks here. As money continues to come out of bonds and equivalents, with interest rates getting a nice bounce, the money will flow towards equities (stocks).”

Bob Doll, chief market strategist at Nuveen Asset Management, offered this. “A combination of climbing corporate profits and a solidifying global economy should push stock prices higher over the coming months. While economic data will likely be somewhat uneven, we believe the odds favor the improvement of global economic growth.” A good reason to include international issues in your holdings. Think companies and what they do – not necessarily the countries where they’re based…

Tom Lee, co founder of FundStrat Global Advisors, has been a long-time bull. He reinforced that with these comments this last week. “”I think it’s an up year, in a horizon where I think we’ll have several more years of gains.” He added that, “this is a bull market that’s been around a long time and I think it’s frustrating people because it’s been hard to beat and it’s volatile.”

He has a year-end target for the S&P of 2325 and suggests that investors shift from the defensive investments in sectors like utilities into the cyclical beneficiaries such as technology, as well as the financials and energy issues.

Ross Koesterich, market strategist at BlackRock, reinforces of Mr. Lee’s investing advice. He says that “bond market proxy sectors (utilities and REITs, for example) look extremely vulnerable, as their valuations are highly sensitive to increases in interest rates. Given this dynamic, we’d continue to focus on more cyclical, less rate-sensitive segments of the US equity market: technology, financials and integrated oil companies.”

About those utility shares

With bond yields rising these past couple weeks, the sectors of the market that investors have been flying into the past few years in their search for yield have come under more selling pressure. These recent price drops suggest that it won’t take too much of a rate rise to create further selling.

Historically, the record shows that utility shares have usually traded at a discount of about 20% to the overall market. Up until last week, the sector had been at a premium of 7%! If you understand that this is a business that is highly regulated in what it can sell its products for which, by extension, limits its earnings growth potential, the only thing that can justify the previous premium has been the low interest rates.

I suggest that you heed the advice of Messer’s. Lee and Koesterich and consider reallocating at least a portion of your assets from the bond proxy type issues.

Summary

Well, say those who don’t buy into my positive outlook for stocks, what if I just go into cash alternatives to be “safe”? Well, we know that CDs, money markets and most bonds coming due in less than 5 years actually do pay you less than nothing today – after factoring in taxes and inflation. Nonetheless, if you for sure need a chunk of money for a specific purpose in 3 years or less, it’s probably best to bite the non-return bullet and put that piece of money in those kinds of things.

However, for your longer-term goals, you need to include a growth component in your strategy. The reality is that there is no investment that doesn’t have risk(s) of some kind or another. The reason you need to have a well-thought out asset allocation strategy – that you stick with – is that investing is not about safe and unsafe.

A major key to successful investing is about creating the most appropriate balance of risk and return within your overall holdings that will give you the best chance of getting to where you want to be when you want to be there.

Please let me know if I can be of help either creating or reviewing that for you.
Cheers!

Mike

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx

Past performance is not indicative of future returns.

Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.

Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.