Last week the Dow Jones Industrial Average reached record highs. Many expect the Standard & Poor's 500, a broader market index, to follow the Dow's lead soon. Is this a time to consider committing significantly to U.S. equities, or a time to take profits?
Most experts feel that the current U.S. economic recovery has yet to hit its stride. They cite weak GDP growth as evidence of a recovery that has not begun to gain traction or build up a full head of steam. Economists tend to be bullish about the U.S. economy's immediate future. Fidelity Research touts an expected manufacturing renaissance fueled by cheap energy and a significant recovery in housing. JP Morgan Asset Management feels that U.S. equities remain undervalued.
Unemployment fell last week to 7.7%. The Fed has promised a return to a more "traditional" interest rate environment once unemployment reaches 6.5%. Many Fed-watchers believe that interest rates could begin moving up during the later part of this year or early in 2014. The Fed's adoption of a rising interest rate policy may spark a rotation out of fixed income investments, possibly into equities. Or, a move to a tighter monetary policy could throw a bucket of cold water on a hot U.S. equity market.
Many market experts believe there is up to $3 trillion sitting on the sidelines in cash. These balances are held by investors who exited the equity markets during the 2008-09 crash and who have remained out of the equity market (mainly due to fear). Most of these balances are thought to be held by small investors - those who tend to get into the market at the top and exit at the bottom.
Has this four-year bull market run its course or is there another leg up, possibly fueled by the re-emergence in the equity markets of the small investor? Although there are plenty of reasons for the market to catch its breath, don't bet against another move higher.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at firstname.lastname@example.org or 414.828.4015.
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