As stocks rise, so does anxiety: Time to get out?
New York • Is it time to cash out of stocks?
The market has nearly tripled in a little over five years, and the Standard & Poor’s 500 index closed above 2,000 for the first time on Tuesday. With each record, the temptation grows to take your winnings and flee.
Plenty of experts think stocks are about to drop. But many others offer compelling arguments for the rally to continue for years.
The bulls point to a strengthening U.S. economy. They also like that companies have plenty of money to keep buying back their own stock.
The bears argue that stocks already reflect years of future profit gains. They also note that many economies around the world are stumbling and that U.S. interest rates could rise soon.
Remember, though, that even the best investors find it nearly impossible to time the market to catch the lows and highs.
The bull and bear cases in detail:
A STRONGER ECONOMY
Four of the past five bull markets have ended with investors selling in a recession, or bailing out because they anticipated one. The odds of a downturn anytime soon? Not very high, at least based on the latest economic reports and forecasts.
The U.S. economy is expected to grow 1.5 percent this year, then 3.4 percent in 2015, according to Congressional Budget Office estimates released Wednesday. One reason is companies are hiring at the fastest pace in eight years.
"This recovery will last several more years," says Jim Paulsen, chief investment strategist at Wells Capital Management.
Analysts expect earnings from companies in the S&P 500 to rise 8 percent this year, then 12 percent in 2015, according to S&P Capital IQ.
LOW INTEREST RATES
Interest rates are low, and that’s been great for stocks. They help lower borrowing costs for consumers and businesses. They also hold down interest payments on bonds, making stocks look more attractive by comparison.
Many investors expect the Federal Reserve to start raising short-term rates in the middle of next year. If the Fed keeps the hikes small, the stock market might shrug it off.
That’s what happened in the last round of Fed hikes, in 2004. The S&P 500 gained 9 percent that year.
Torsten Slok, chief international economist at Deutsche Bank Securities, notes that the short-term rates that helped drag stocks down at the end of the last seven bull markets were all higher than 4 percent. With the Fed holding those rates near zero, it could take many hikes for borrowing costs to rise enough to cause damage.