Is Now a Good Time to Buy Stocks?
With the Dow hitting new record highs, some investors are flocking back to the stock market after a long absence. Part of this is because even though stock returns are far below what they have been for the past few years, they are still much better earners than bonds are right now. Additionally, judging by the first quarter of 2013, it does appear we are heading toward a bull market. Investors also feel that stock prices are cheap right now, but this is a bit of an illusion because company earnings are higher than ever. Before you get online to buy or call your broker, here are some things you should consider about the stock market.
The European Union Crisis
It would have been nice if Cyprus could have gotten help from a simple lender, like one of us would individually - but things are not that simple. The banking situation is still far from stable in Cyprus and, as of this writing, Cypriot banks are closed again because of an employee strike. Other countries in the European Union (EU), such as Luxembourg, are also teetering on the edge of bank failures. Luxembourg has banking assets that are well over 20 times the size of the country's economy. Banks in the United States have $353 billon dollars invested in countries that are part of the Eurozone crisis like Portugal, Italy, Greece and Spain. Further bank failures in the EU will no doubt affect banks in the U.S., which will have a ripple effect on the stock market.
History May Repeat Itself
Stock investors were burned twice during the last decade. The first time was in 2000 when the dot-com bubble burst and then again, when the housing market collapsed in 2007. In both cases, the stock market peaked, as it is now, right before the frenzy began. In fact, stocks have only climbed slightly higher than they were 13 years ago, so many people are skeptical about how long this bull market is going to last. A lot of investors are taking a wait-and-see approach because the rapid growth of the Dow Jones Industrial Average is too recent for them to determine if it is truly sustainable. As mentioned earlier, the next crisis to hit the stock market could very easily come from the EU.
Blue Chip Stocks are Still Secure
On the plus side, old favorites like Johnson & Johnson Inc. and Campbell Soup Company are still hot targets for many investors. The current investing trend is to stay away from riskier investments like technology stocks and put money into companies with a solid growth history and strong brand name. If you are willing to live with moderate returns and hold the stock long-term, then blue chip stocks are just as good investments now as they have always been. Traders who get greedy, or want to make a lot of money quickly, may find that these solid performers are just too staid for them. Additionally, if you are a notorious short seller like Rachel Fox, blue chip stocks are definitely not for you.
Stocks are Overvalued
Fund manager, John P. Hussman, did an analysis of the market and found that stocks are overvalued by 52% as of April 1, 2013. Another conclusion that Hussman reached is that investors can expect to only earn a 3.5% return on their investments. Granted, this is better than the current paltry .5% rate on savings accounts, but it is far less than the average 10% that investors were used to. The gross overvaluation of stocks does not necessarily mean that the stock market will crash, but if corporate profit levels quit rising, or start to drop, many investors could have to deal with capital losses. With the U.S. economy still limping back into economic recovery, it is hard to say which way the market will go.
Hedge Against Inflation
Another reason to consider investing in stocks now is that inflation doesn't show any signs of slowing down. As assets like cash and bonds drop in value, stable stock earnings can help hedge your portfolio against inflation. Considering some of the bold moves the Federal Reserve has made recently to spur job creation, this could become a major point. If the United States economy fully rebounds to pre-recession levels, then inflation may cause the stock market to drop. However, if the Fed finds a way to curb inflation to stimulate job growth it becomes a moot point. Once again, investors who use stocks as an inflation hedge are speculative about what is going to happen and they are not making very bold moves right now.
Consumer Confidence is Still Low
Companies are seeing higher profits due to technological innovations and better business management strategies; not because people are buying more. Joe and Jane Consumer are still reluctant to part with their cash. In particular, the higher payroll tax deductions that started in January of 2013 have made many people far more budget conscious than they have been in the past. Additionally, the United States has yet to see the full impact of the sequester cuts. The trend towards companies making high-profits that investors are seeing now, may very well level off to more moderate levels over the course of the year. If this happens, stocks will not be as an attractive an investment as they are right now.
If you feel that your risk-tolerance level can support it, then now may be a good time to buy. If the Dow Jones Industrial Average and the S&P 500 keep going higher, then now is the perfect time to get back into the market it. On the other hand, if any of the aforementioned factors causes the markets to drop down the levels we've seen the previous few years then you could be holding those stocks for quite a while. There is no 100% right or wrong answer as to whether now is a good time to buy stocks. Assess your personal investment situation and draw your own conclusions about how many risks you are willing to take.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.