With market gains, investors face quandary

New York TimesMarch 9, 2013 

So is it too late for investors to join the party?

The stock market has already more than doubled since the dark days of 2009. Records are being set, and most indexes have risen nearly every week this year.

Nearly all strategists point out that it’s much better to buy at a market bottom than to invest after a record has been set. Nonetheless, for those willing to accept the risk, there are strong arguments, based on history and on market fundamentals, for believing that the bull market may still have room to run.

Chief among them is the expansive monetary policy of the Federal Reserve.

“The old song on Wall Street is ‘Don’t fight the Fed,’ and that certainly has been the case in this market,” said Byron Wien of the Blackstone Group, a veteran of many market rallies and slumps. “The Fed and other central banks have been driving the market, and there’s no sign that’s going to stop.”

Another critical factor is the flow of funds into the stock market, said Laszlo Birinyi, who runs a stock research firm in Westport, Conn.

“There is still a lot of money sitting on the sidelines – and there are a lot of people who are still jumping in, and that, in itself, is a good thing for the market,” he said.

According to his calculations, the net inflow into stocks over the past 12 months has totaled $76.7 billion, which helps to explain why the Standard & Poor’s 500-stock index has risen more than 13 percent in that period. Net inflows to stocks amount to $27.75 billion so far this calendar year, he said, and barring a big shock, they are likely to continue.

“We’re in the fourth and last stage of a long-running bull market,” he said. “We think there’s a lot more to come.”

No one really knows whether history is a reliable guide, but the pattern of past bull markets also suggests that this one could continue to flourish. At the moment, according to the Bespoke Investment Group, the current nearly four-year run of the U.S. stock market is the eighth longest in the past 100 years, and it is the sixth strongest, in terms of the return of the S&P’s 500 index. And since 1900, when the Dow Jones industrial average reached a new high, as it did last week, the Dow has averaged a 7.1 percent rise over the next 12 months.

“We believe stock valuations are still reasonable, and that the momentum of the market will keep moving it upward,” said Paul Hickey, co-founder of Bespoke.

‘There are problems everywhere’

Because of the intervention of the Fed, even some longtime market bears are reluctant to bet against the current rally.

“This is impressive, no doubt about it,” said David Rosenberg, the former chief North American economist at Merrill Lynch and now chief strategist of Gluskin Sheff in Toronto. “There are many major risks out there, but at the moment the central banks are doing a spectacular job of buffering them.”

Rosenberg has a reputation for being a “permabear,” and he has recently emphasized investing in high-yield bonds and corporate credit instruments over stocks. As far as the immediate future of the stock market goes, he said, “I think we’re overdue for a correction.”

Major problems on the horizon, he said, include a weak economy that is being hobbled further by the recent payroll tax increase and the indiscriminate federal budget cuts that have just been put in place. And the troubles in the eurozone, which flared last month in Italy, are far from over, he said.

“There are problems everywhere you look,” Rosenberg said.

Yet he is reluctant to predict a sustained stock market decline. Precisely because the economy is weak, he said, the central banks will be forced to keep short-term interest rates low.

“People seeking income have been fleeing other asset classes,” he said, “and they have been moving their money into the stock market.”

Market ‘still grounded’

Not everyone is sanguine, however.

“It’s getting downright embarrassing to be bearish with all this exuberance around,” said Rob Arnott, the chairman of Research Affiliates, an asset management firm in Newport Beach, Calif. “With so many people eager to buy stocks, it’s a wonderful time for us to take some risk off the table.”

Arnott, who manages the Pimco All Asset Fund, said the economy is weak enough that there is a reasonable chance the United States is already back in an undeclared recession. An economic or financial shock could induce a sharp market decline, he said.

“My view is simple,” he said. “Could this rally continue? Absolutely. But do I want to take a risk on a rally that will at some point certainly reverse and leave a lot of people helplessly trying to de-risk in an unliquid market decline? No. I don’t want to be part of that crowd.”

In the logic of contrarian investing, this kind of pessimism encourages Birinyi.

“Market sentiment has not reached irrationally positive levels yet,” he said. “That implies to me that the market is still grounded, and that it can keep on rising.”

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