I had a long conversation with some real estate brokers and home developers I know in California and Las Vegas and the takeaway I got from them is that housing is on fire in those markets. Yet they all said the same thing: prices are still reasonable. The takeaway I got from these conversations is that the housing market is roaring back to life, and with it the credit markets and banks in general should benefit substantially. I think this bull market has room to go significantly higher over time and it's part of the reason I think we're in a secular bull market.
If you think about the psychology of investors, which is what the stock market is all about, then it's easy to come to the conclusion that the market has room to go a lot higher. Most people have missed out on the rally from 2009 until now primarily because of fear. There have been a limitless supply of reason to be fearful: from a potential collapse in Japan to problems in Europe to Middle East riots and political upheaval and on and on. Remember Dubai? Can you believe people actually sold stocks because of that?
If you ask the average person what they think about the stock market they will tell you that one of three things:
(1) It's a scam
(2) Everything is propped up by the Fed
(3) The governments are too involved
They will also question how it's possible that the market can be near all time highs when the unemployment rate is at 7.7% and the economy is so weak. So you have this massive amount of hesitancy to get back into the markets, which is the perfect backdrop for higher prices.
However, I think people are finally starting to come to the conclusion that the economy is getting a little better and that things might not be going down the tubes like the perma bears and media would have them believe.
In terms of the normal cycle of markets, there are usually 3 or 4 phases marked by fear and distrust, then reluctance, then acknowledgement, then greed and euphoria. We're probably still in the middle stages of where people are acknowledging things are better but still distrustful. We're not even close to euphoria. People haven't fully embraced stocks. You can see that by looking at the average trading volume in stocks. It's way down compared to 10 years ago. So it's mostly professional money managers that are in the markets, certainly not the vast majority of individual investors. Below is the chart courtesy of Goldman Sachs (GS):
With this in mind, I think it is still ok to be putting your money into the market. The market has rallied quite a bit this year so most likely what will happen is you will get a few months of digesting the gains and moving sideways and then yet another leg higher probably on the back of continued improvement in housing and credit markets. Financials should continue to do well in this environment. You can buy the entire financial sector ETF (XLF) or two individual stocks I like because of long term earnings potential and potential dividend yield are Bank of America (BAC) and Fortress Investment Group (FIG), respectively. Bank of America is trading at only 9 times 2014 earnings projections of $1.30 and over the peak of the next business cycle it is easy to see BAC earnings $3 per share and the stock trading in the $30's with a 2% yield (or 6% on today's money). They are direct beneficiaries of improved housing and credit markets.
I also think that it makes sense to put money into transportation companies (IYT) since they will benefit from increased economic activity. After a 5% pullback, I think it is a good time to start putting a little money to work in this sector. It is not as good of a time as last October when I recommended buying the transports but longer term I think this sector will continue to do well.
Despite the rally in the markets over the past several months and what I think will be some sideways trading for a few months, it is still my belief we are in a secular bull market and that the stock market will do well for the next several years. I don't think people putting money to work right now are stretching for just the last few percent of this bull market. With the Fed keeping rates low and with inflation low and with public sentiment still pretty negative, there should be plenty more room for this market to run higher over the coming years. I would use weakness over the coming weeks/months, if there is any, to move into the market if you haven't already.