As February drew to a close, the Dow Jones Industrial Average topped 13,000, a peak not seen since early 2007. While many investment professionals agree that it’s just a number and that reaching it creates no tangible benefits, it’s also hard to deny the strong psychological impact of reaching the 13,000 threshold. You don’t have to be a renowned investment guru to know that success in the markets is often won – or lost – on hearts and minds. Perception is a powerful factor in investment decisions.
Although some believe that euphoria around such milestones can’t move markets upward, some Wall Street experts believe the Dow’s recent gains are a strong sign of economic recovery. They hope to see these gains continue into the next few months.
Things appear to be different in 2012 – and not only on the Dow. Last year at this time, the economy was moribund with better-than-expected corporate earnings as the only bright spot in the grim picture. 2012 earnings are not expected to achieve last year’s stellar 16 percent growth rate – market experts are predicting somewhere around 5 percent or 6 percent is more likely. This year, the good news is coming from the economy. Consumer borrowing has rebounded, customers are back in the stores again and the unemployment rate has declined faster than anyone expected. Whether declining corporate earnings hurts investors’ confidence remains to be seen, but conventional wisdom suggests that markets tend to react to the economy.
If positive economic news continues in the United States and there are no further financial crises in Europe, many analysts believe investors will not get too rattled by an earnings slowdown. Earnings tend to be cyclical, and 16 percent is not a realistically sustainable growth rate.
While it is good to see signs of calmer waters, stock analysts urge investors to be aware that times have changed and that ‘the good old days’ won’t be coming back. New technologies, the speed of global communications and new financial tools have brought benefits to the markets and to the investment community, but they have also created the potential for greater volatility.
All this means that we can expect a higher incidence of market shifts and steeper highs and lows.
In the here and now, investment pros are urging those who pulled out of the equity markets – or pulled back – to be open-minded and consider where stocks might fit in their investment portfolio now. It might be time to assess – with help from your tax and investment advisors – how your financial situation and risk tolerance have changed since the crisis took hold in 2007.
If you decide to add some equity, there are plenty of buying opportunities. Various industry sectors have begun to show impressive stock gains – retail and home improvement are two of the most obvious.
As always, the above comments are general in nature and are not intended to replace the counsel of professional investment and tax counselors.