It wasn’t too long ago that people were jumping out of windows because the market was spiraling down into a dark and evil abyss. Now the market seems to hit new all-time highs every day. And that’s not all. The S&P 500 has risen for the last 6 months straight. No wonder everyone is feeling a bit happier these days. The question now is what lies ahead?
In order to really get a sense of what may be in store, it’s helpful to consider what might be behind the current strength.
The first quarter ended with strong earnings and housing reports. Also, gas prices fell. These positives may have countered the fear that many investors have over domestic deficits and financial instability in Europe.
Don’t get me wrong, the domestic economy isn’t ripping it up. GNP expanded at an annual rate of only 2.5% in the first quarter. It’s nice, but it’s not stellar. But it’s that muted growth that reinforced investors’ hopes that the Fed will continue to juice the system with stimulus – and they like that idea. Also, with fixed income bonds being so risky and paying such paltry rates more investors are willing to give equities a try. They may feel that they have no other option. And this rush of new investors into the market is also helping push stock prices higher.
A Closer Look At The Positives And Negatives
Lets look at corporate earnings because ultimately that’s what drives stock prices. Earnings were only up 3.9% over the last 12 months. And sales were actually down a fraction according to Reuters. 70% of the companies that have reported beat earnings estimates but half failed to hit their sales projections. You can see that this is a very mixed bag.
Fuel prices fell by 3.5% last month. And that’s 9% below the average price in 2012 as reported by AAA. Home prices are up 9.3% over the last 12 months and that’s the best results in the housing market since 2006. These are both very strong positives for equity investors. Strong housing prices often lead to more consumer spending. This (and lower gas prices) generally are powerful stimuli for the economy at large.
Even though people are very concerned about what’s happening in foreign economies, overseas markets have done well. That’s more proof that the market is extremely difficult to predict in the short run. The one area that has been a big downer for investors has been gold. People who buy gold won’t remember April with any fondness. GLD (the largest ETF that we can use as a proxy for gold) fell 7.5% last month. And it’s 23% off of the high it reached in 2011.
As always, there are positives and negatives competing with each other. If some “wisenheimer” commentator tries to convince you that the market is going to do this or that it’s because he or she is ignoring one side of the story or the other.
The market has rewarded investors recently. There are good reasons for this and that strength may indeed persist. But there are always risks and things can change very quickly. Don’t let that impact how you invest. In the long-run, you’re better off if you resist getting caught up in the emotional side of investing and stick to your long-term strategy – be it buy and hold or market timing.
For example, rather than try to predict the future, one alternative is to allow the market to tell you which of the competing forces have the edge at the moment. Then all you have to do is follow that direction.
I suggest that you have no emotional attachment to whatever investment process you use and be willing to be wrong. Overtime, the most successful investors are those with a proven investment strategy they stick with.
Are you changing your investments now? Are you becoming more aggressive? More defensive? Are you asking yourself other investment questions before you make a move right now? Why?