How to Embrace New Highs
Market news has moved from the business section to the front page.
In most circumstances, this would be a bearish development — the sign of potential market top. But following a lost decade of crisis and fear, newfound confidence in stocks is a sneak peek at what’s to come.
For now, we have media-ready numbers lighting up the Big Board. The Dow Jones industrial average topped 14,000 Friday. The S&P 500 continues to dance around the 1,500 mark. More importantly, new all-time highs are within spitting distance.
These round numbers in the market can become emotional touchstones. After all, the last time the Dow posted all-time highs was back in late 2007 — just as crisis loomed under the surface of the markets. Those all-time highs came at a very different point on the sentiment spectrum. Unemployment was lower. The housing bubble had not officially popped. And a devastating financial crisis had not yet unraveled the confidence of the markets.
Yes, the market is near new highs. But that’s nothing you should fear. It will take time to push past these emotional round numbers. Yet when they are far enough in the rearview, investors (and the markets) will finally have put the bear behind them.
As we witness the broad push toward new all-time highs, here are a few reasons you should embrace this rally:
First, it’s important to understand that investors are more cautious than you might think…
You already know the big headlines. After more than a decade of panic and despair, stocks are attracting the attention (and dollars) of the investor class. More than $34 billion rushed into stocks in January, according to Lipper, the most in more than 15 years.
That’s an abrupt change — but it isn’t a climactic move signaling a top. You must put it in perspective with the trends of the post-financial crisis market. Remember, 2012 saw record inflows into bonds. Here’s a snippet from 24/7 Wall St.:
“After investors piled about $1 trillion into the bond market, close to $550 billion came out of stock funds, according to PNC Wealth Management, as investors sought safety and the return of capital rather than a return on their capital between 2008 and the end of 2012.”
As you can see, the big money making its way into the stock market so far this year is just a drop in the bucket. Investors have much more tied up in bonds and cash. They will look to put this money to work soon.
Also, I believe the massive shift from bearish to bullish will level out in the weeks and months ahead. The changes in attitude will not be as abrupt as we witnessed in early January. Investors will return to second-guessing the market. New worries will emerge. The market is giving back its Friday gains this morning. That’s fine. Let stocks churn a bit.
Once the fascination with new highs falls off the front page, the market can go back to climbing the wall of worry. Stocks will have good days and bad days, good weeks and bad weeks. But after you cut through the noise and look at the big picture, you will see that new all-time highs will mark a new beginning for the markets.
Throughout all of the breathless coverage, stocks will continue to stair step higher.
Greg Guenthner, CMT
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