CHICAGO (Reuters) - Every time I hear the rumblings of a broad-based stock rally, a song from The Who echoes in my head: “Won’t Get Fooled Again.”
Well, I‘m not going to tell you that this time it’s different, because it’s not. You just can’t predict where the market is going based on two out of 12 months. There are some awful nasty things swirling around out there - European sovereign debt, a dreadful U.S. housing market, oil price increases, Middle East tensions. If you have worry beads, they are probably worn to the nub.
Yet there are some signs that the stock market’s animal spirits are not just howling at the moon.
On February 24, the Standard & Poor’s 500 Index hit its highest level since the collapse of Lehman Brothers in 2008. Will the rally continue? If the United States is in a sustained economic recovery mode, then broad-based investing makes some sense now - if you can afford to be in the market at all. Here’s what I‘m seeing:
* Cyclical stocks - companies that respond to changes in business cycles - have been leading the way. That means institutional buyers believe - for the time being - that sectors like consumer discretionary companies (luxuries, entertainment, technology) will benefit from higher consumer spending. That’s a good sign the larger U.S. economy is on the mend. According to Standard & Poor’s Capital IQ, “this sector can keep outperforming as low economic expectations likely continue to be exceeded.” What S&P is saying is that if most economists are wrong about 2012 being sluggish at best, you’re going to make money betting against these dismal scientists. If consumers keep their wallets open, then you’d want to be in a diversified exchange-traded fund like the iShares S&P 500 Growth Index.
* The stock vs. bonds sentiment may have shifted. When the economy is contracting, bonds are favored. When the opposite is true, you should be in stocks to get growing slices of corporate earnings. If the movement toward stocks continues, bonds may be laggards this year (they led the pack last year during the tumult). “Momentum, a powerful risk guide in a secular sideways market, pushed into bullish territory in January,” writes Jack Ablin, chief investment officer of Harris Private Bank, “prompting us to raise our exposure to stocks. Our metrics confirm a generally bullish view of the equity markets over the next 12-18 months.” Ablin said the bank’s current allocation slightly overweights “high volatility” stocks such as those of large companies and in emerging markets. Its current allocation is 57.5 percent stocks to 42.5 percent fixed income.
* There's always risk. There is the danger that some mega-event will reverse this bullish direction. Stratospheric oil prices wouldn't help. A major European sovereign bond default is also toxic, which is increasingly unlikely. Maybe the real smart money is moving outside the United States into global stock funds and emerging markets. According to the Investment Company Institute (www.ici.org/research), the amount of investment dollars flowing into foreign stock funds was more than 30 times greater than what was being invested in U.S. funds in their most recent fund flow survey. The real question isn't whether you're timing the right U.S. stock sector, but whether you have broad exposure to every major stock market. The Vanguard Total World Stock Index ETF gives you worldwide coverage; the iShares MSCI Emerging Markets fund captures profits from developing countries.
OK, so here’s my standard disclaimer again, loud and clear like a rock song chorus: It makes no sense to forecast an entire year based on a few weeks of promising numbers. Market predictions come and go like snowflakes. It could all turn to slush tomorrow. What’s more prudent is to estimate how much you’ll need to save to ensure a comfortable lifestyle in the future.
So before you get amped about how much money you can make in the stock market, take a look at whether your long-term plan is on track. Are you saving enough? Are you taking too much risk to reach your goals? What do you need to adjust?
Do a quick check with online tools such as ES Planner (www.esplanner.com/)
to see if your course is true. The program is costly, but there is a free version called ES Planner Basic for those who want to try it out:
The most productive attitude toward the market is to ignore short-term trends and do some meaningful long-range planning - and stick to your plan. Then, having adjusted your portfolio to how much risk you can afford to take, no matter what happens, you can’t say you were fooled again.
Editing by Linda Stern