It seems like the experts are using some very fancy language to say that the stock market is doing quite well and... we don’t really know why. Despite a lot of hand wringing regarding the dangers of rising taxes and growing deficits in the United States- and fears of a meltdown in Europe- it appears that many investors have adapted to a changing world economy more easily than the pundits. These pragmatists are not following the old dictates of Wall Street strategists; instead, they are propelling a rally that is following new principles.
Ignoring gloom-and-doom economic rhetoric fueled by election campaigning, the truth is that the United States economy has been in a modest, steady recovery for some time. Consider the world economy as it is now, and our position is advantageous. Recent highlights include the Standard and Poor’s 500-stock index returning to its post-recovery highs over the summer months. Rhetoric aside, the numbers don’t lie. The housing sector, a very real factor in the nation’s economic health, is finally showing signs of revival. All this has not been lost onU.S.investors. The world is not the same as it was pre-recession, and using criteria from a decade ago as touchstones for investment strategies makes little sense.
Observers note that in this current rebound, stock-buying patterns are bucking the trends. Generally speaking, when the market begins to rebound, investors start buying riskier stocks – those considered more economically sensitive. Conversely, investors are expected to spend their equity dollars on safer bets in tougher times. This traditional buying pattern has lost some of its luster recently. The flight to safe bets in bear markets has made consumer staples pricey, and ironically, the so-called riskier stocks have begun to look much more attractive to investors with a longer-term focus. During market lows, individual investors have discovered that a number of economically sensitive stocks have been relatively cheap (some cheaper than they have been for 20 years or more).
Investors might be willing to take on more risk, but savvy investors are selective about the sectors they buy. For example, investors might be ready to take on more risk and buy stocks in the housing sector because home prices are finally on an upswing, but their focus will be on those industries where the best business growth opportunities exist. In other words, investment experts are pursuing targeted, rather than broad-brush, approaches to building investment portfolios.
Is this a positive sign? Most definitely, it is. To some extent, the market will always be at the mercy of unreasonable fears and emotional decisions, but recent buying trends suggest that investors are looking to the fundamentals – earnings, growth prospects and valuations. Is there a downside to this optimism? Of course, there is bound to be. Given the contrariness of market logic, some investment pros are beginning to wonder if the best part of the rally might be already over. If the tide has turned, and consumer sentiment has reached an upswing, we could see a rush of investors re-entering the equity markets. If too many have waited too long to get back in the market, this could push valuations higher and limit the opportunities for gains.
As always, the comments above are intended as general observations. They are not intended to replace the professional counsel of your tax and investment advisors.