- The global markets are enjoying a bull run and the fundamentals of this are certainly sound.
- There is a strong sentiment about the housing bubble in the US being finally corrected.
- Here are the reasons why investors are excited. Investors are now able to chose stocks by their performance, value and futures.
The mood in 2014 is decidedly different from the market sentiment that gripped the international arena between 2008 and 2012. The bear market that saw trillions of dollars wiped off the international scene is now in the rear-view mirror. The housing bubble in the US - the cause of much of the market's woes - has now corrected itself, and healthy growth in the housing sector is taking place. The proof of the pudding is not always as evident as one might expect, but there are clear market signals that demonstrate - beyond a reasonable doubt - that big changes are afoot. These come in the form of individual stock performance. For many years, the poor performance of the global economy was in fact the self-same performance of individual stocks in the S&P 500 index. Investors witnessed stock prices moving in tandem with the general market movements - up or down. This negated the positive gains that individual stocks may have generated, since market sentiment overruled individual stock performances. Value was hard to come by during 2008 and 2012, but the tide has finally turned.
The Dawning of a New Time: Value and Performance
Investors now have the option to cherry pick stocks based on value, performance and future projections. The financial crisis put the brakes on economy, as investors around the world withdrew hundreds of billions of dollars from the stock markets. Naturally, cash reserves of companies were at an all-time low, growth flat-lined and performance declined. By 2013, the global outlook was more positive, and this sentiment is now being termed a bull market. For several years, investors bailed out of managed funds, fearing that their investments were doomed. Nowadays, the opposite is happening, investors are finding value in actively managed strategies. Money managers are now reporting massive inflows, and funds under their management are growing. During 2014 alone, the value of managed stock funds has generated a net amount of $1.3 billion; this is over and above the $9.8 billion that was generated during 2013. Contrast these figures with the net outflows of $360 billion during 2009 and 2012. This is certainly proof that market sentiment has improved dramatically since the catastrophic global crisis hit.
Financial Portfolios are Seeing More Stocks Being Included
Financial portfolios are made up of a variety of investments, stocks being the most volatile. During times of economic crisis, investors typically yank their money out of the stock market and pour it into safe haven investments such as treasury bonds, gold and silver. During 2009 and 2012 there was widespread disinvestment in the stock market, but that's all changing. Investors are now finding value in stocks with strong fundamentals. Investors are, for example, deciding to invest in individual stocks as opposed to index funds and mutual funds. The benefits of sound individual stock investments - performance wise - regularly outstrip the performance of large funds which tend to provide tapered growth. Further evidence is available in the form of correlations between individual stocks and general stock trends. If we look at the S&P 500 index as a case in point, there is an interesting phenomenon that is taking place during 2013 and 2014. The level of correlation - or fit - between individual stocks and the overall stock market is less pronounced. If we assume a value of 1 to be maximum correlation, then we can clearly see that from 2009 to 2013 the average correlation was 0.63, while the correlation in 2014 is down to 0.52. What does this figure mean? Individual stocks do not march in lockstep with general stock price movements. At least they don't at this point in time. This is a clear signal to investors that value can certainly be found in the right stocks with the right fundamentals.
Cautious Optimism is the Order of The Day
A closely-related indicator of stock market performance is that of directional movement of individual stocks and the S&P 500 index. From August 2011, there were 12 days of every month where all but 10% of stocks in the S&P 500 moved in the same direction - up or down in a single trading session. Fast-forward two years and we see that the same number of stocks in the S&P 500 only share 1.3 days per month of the same directional movement - up or down. This is one of the most encouraging signs in a long time. The stability of the present trends is always uncertain, and the Ukrainian crisis could boil over to upset market equilibrium. Index funds remain a viable investment option, as is clear from the $9.8 billion invested during 2014 to date. Caution is always recommended since market stability is never guaranteed. In the event that an energy crisis unfolds as a result of Russia's military occupation of Crimea, the euro zone may be hard hit. This can have a detrimental effect on the European economic recovery, which will have a domino effect on the global markets. The markets are always driven by speculation and sentiment and less is based on reality than on perception. Emerging market economies, for example, are cautiously eyeing what the Federal Reserve Bank is doing vis-à-vis the bond repurchases program - otherwise known as quantitative easing. Should the Federal Reserve Bank decide to continue tapering its monetary policy; this will have a detrimental effect on emerging market economies.
A quick recap of what was and what is puts things into perspective. In 2009, at approximately the same time of year, the S&P 500 closed at 676.53. Since that time, the S&P 500 index has dramatically increased its gains by a figure of close to 180%. Further, the P/E ratio is 15.8 - the highest since the final quarter of 2008. Revenue growth in the S&P 500 index has sustained a mere 3.2% growth since March 2009, while earnings growth has averaged 16.2%. Credit is being made available to investors, as evidenced by the increasing margin debt figures. Investors are using borrowed funds to generate returns - another clear indication of a bullish market.
I believe that individual investors can win the market by holding up to 10 stocks and managing them actively, though it isn't an easy task to do! It takes a lot of time invested in studying the market sentiments, learning how to read charts and how to interpret market analysis. If you don't have the time and the passion to research individual stocks, then don't even bother, as it might be a financial disaster. On the contrary, if you have the inclination and the time to spend learning and analyzing, you can expect a great success.
If you ask me why you should consider buying individual stocks rather than dividend ETFs, my answer is that individual stocks offer not only market-beating and strong yields, but they are by far one of the best dividend-growers nowadays. Take for example Wal-Mart (NYSE:WMT) in 2013: it has increased its dividend every year since 1974 when it declared a dividend of $0.05 per share. Also, the company raised its distribution by 18% during 2013, and now provides 2.5% revenue to new investors.
So if you are looking where to invest, individual stocks is the answer at least for the next quarter of 2014. Good luck!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.