Confidence in the U.S. economy rose in May to its highest level since July 2007, according to a recent article on bloomberg.com by Lorraine Woellert. Together with rising home prices across the country, a firming labor market in the private sector, and the wealth effect of a rising stock market, this increase in confidence has important positive implications for the investing landscape and what you should do with your portfolio.
With the market at all-time highs every investor faces important questions: do I buy at these lofty levels? Do I sell and take profits? Do I wait for a correction and a better entry point? If I wait will I miss the rally (as many already have) waiting for an expected pullback?
The Negative Chatter of Gloom and Doom is Likely Wrong
Every day we are bombarded with new book titles, articles and commentary from "experts" blaring statements like: Billionaires Dumping Stocks, Stocks to Fall up to 90%, The Stock Market is in a New Bubble, and The Housing Market is a Bubble. For some the sky is always falling. Of course, anything can happen but these dire predictions are often little more than simple fear mongering. Fear sells books and gets people noticed.
People selling this fear are not really helpful experts letting you in on some special knowledge they have. Nor are they letting you in on claimed "secret" information others don't want you to know. Instead, they are usually selling a product and using fear and mystery to capture your attention.
This negative chatter is nearly always wrong. It is noise and should not distract you from your analysis of what is happening in the economy and in the companies you own.
The Chatter of a Correction Ahead is Likely Right
The U.S. stock market has been on a tear since bottoming in March 2009. In the past six months alone the S & P is up 300 points and has now blown about 100 points past its previous all-time high.
Common wisdom has been that the market needs to rest and a correction is not only expected, but imminent. So far, it has not played out that way.
But experience and history tells us that the market will, at some point, correct - it always does and it always has, we just don't know when that will occur. In fact, we usually see multiple corrections of a significant magnitude in the market each year.
So as you look out into the future through the lens of history and experience, you have to ask yourself what is most likely - that the market will continue up for several more months or that it will correct and spend some time consolidating its gains? How you answer this question will guide your decision to either: buy at these record levels, sell and book some profits, or hold and wait for a better entry point with new money.
If you are an investor, you were probably already significantly invested in the market before it started its run. On the buy side: the question for you is do you commit additional capital to either new positions or add to existing ones at this level? The answer (to me) seems easy - as an investor my time horizon is long and I have no need to chase stocks at premium prices. I will wait for a better entry point as I am confident one will come.
If you wait, prepare a watch list of stocks you like that have run up some (but not too much) where you only have a partial position you can add to on a pullback. Examples currently on my list are: Linco (LNCO), Sysco (NYSE:SYY), Mondelez (NASDAQ:MDLZ), Cisco (NASDAQ:CSCO), and the Oil ETF (NYSEARCA:USL).
On the sell side: the percentages favor trimming or selling selected positions that have: a) become frothy from too rapid a rise and seem well overvalued; or b) become too large as a percentage of your portfolio and need to be cut back to an appropriate size.
If you have not been in the market for some time (for whatever reason) the more prudent course would be to wait for a pullback rather than pay up for stocks at their all-time highs. The risk/reward scale, and the percentages, are heavily weighted toward waiting for a better time to re-enter the market.
Economic and Investing Outlook
In any event, the macro picture for the U.S. economy strikes me as much more positive than negative.
- Home prices are rising in most parts of the country - adding equity back into homeowner's balance sheets;
- Housing starts are up and the home and homebuilder sector has been one of the hottest areas of the market as this portion of the economy gradually heals;
- The job market is slowly improving and unemployment is ticking down;
- Consumer debt loads have declined and savings rates have improved;
- Increasing energy independence in the U.S. is creating jobs and will boost the economy in years to come with new industry, new jobs and exports;
- As Europe and emerging market economies struggle, money from those parts of the world is flowing to the U.S. and into U.S. companies as a more secure port in the storm;
- Easy money policies of central banks are not likely to end in 2013.
In sum, the market will certainly pull back at some point this year - sooner I believe rather than later. That will give us better prices and better opportunities than we have at these levels.
Disclosure: I am long LNCO, SYY, CSCO, NOV, MDLZ, USL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.