My wife Denise asked me why stocks were hitting record highs this morning Nov. 18, 2013. I grinned in a manner that probably appeared smart-alecky. For one thing, stock benchmarks hit record peaks on numerous occasions over the last two months without much in the way of resistance. The only difference on this particular Monday are the easy-to-celebrate numbers for the Dow Industrials Average (16,000) and the S&P 500 (1800).
In addition, investors see virtually no end to Federal Reserve stimulus. Granted, the Fed may or may not taper its bond-buying purchases in 2014, while leaving its zero percent interest rates for many years to come. Yet, in the spirit of the future hall-of-fame hoop star Allen Iverson I say, "We're talking about tapering? I mean, we're sitting here talking about tapering?" Every time that the central bank of the United States has ended or modified a controversial rate-manipulating program over the last five years, it has kick-started another policy -- QE1, QE2, Operation Twist, QE3. Investors recognize that the Fed is not serious about interest rate normalization.
Need proof? Revisit the rationale for emergency level money printing (a.k.a. quantitative easing) going back to 2008. In that year, Ben Bernanke said that we needed to enact emergency level QE to inject liquidity into a crippled banking system. When the financial catastrophe concerns faded, however, the Federal Reserve came up with different excuses for providing emergency level stimulus, including trillion-dollar deficits in 2010, Europe's sovereign debt crisis in 2011 and 2012, as well as fiscal cliff/government shutdown troubles in 2013.
Let's face the truth head on. The only reason for not ending the purchase of bonds by the Federal Reserve is because the central bank is afraid of what might occur when the drug (i.e., interest rate suppression) is removed from the addicts (i.e., U.S. investors, consumers and businesses). If it made sense to save a fragile financial system from collapse with emergency liquidity, it does not necessarily make sense to juice stocks and real estate with steroids or growth hormones.
Deflating the balloon slowly may be a bigger challenge for the Fed and central banks around the globe than the initial crisis-aversion tactics of 2008; that is, letting the economy find its own way through a recession could have been more beneficial than endeavoring to eradicate every weak economic data point from 2010 forward. Nevertheless, this is the chosen path. The implication? More and more investors will allocate their capital in ways that they normally would not; more and more bearish prognosticators will flip, just as David Rosenberg, Paul Farrell and Nouriel Roubini have done; more and more money will chase more and more risk.
I am neither bearish nor bullish on stocks. With a well-defined risk management plan in place, one is afforded the luxury of holding onto assets for as long as they continue to provide value. I still recommend adding to stock ETFs with favorable trends like Vanguard Dividend Growth (NYSEARCA:VIG), Vanguard All-World (NYSEARCA:VEU), PowerShares DJ Pharmaceuticals (NYSEARCA:PJP), and First Trust Nasdaq Dividend (NASDAQ:TDIV). While I continue to hold small-cap superstars like iShares Small Cap Value (NYSEARCA:IJS), it may be more advisable to tread lightly in areas where the valuations are getting harder to justify. (Note: Small-caps abroad remain attractive from a price-to-earnings ratio standpoint.)
The bond market requires "duration consideration." In particular, I am wary of erratic price movement at the longer end of the yield curve. Held-to-maturity short-term high-yield ETFs in the Guggenheim BulletShares series remain a sweet spot. I also see limited downside in owning Pimco Short-Term High Yield (NYSEARCA:HYS). And while I remain unwilling to test the treasury waters directly, intermediate-to-longer-term munis via SPDR Nuveen Muni (NYSEARCA:TFI) is rewarding enough in spite of the risks.
Keep in mind, rushing to buy at all-time highs is rarely prudent; clamoring to put cash to work after six consecutive weeks of gains is more likely to fail than to succeed. Let the price activity meet you halfway. For example, an investor who is interested in iShares MSCI Small-Cap EAFE (NYSEARCA:SCZ) benefits from acquiring shares closer to a 50-day or 200-day moving average.
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Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.