Optimism Continues

It seems as soon as the market posts another gain, or a small decline, the financial headlines proclaim we are nearing the beginning of the end – the end of the current bull market, that is. Good or bad, the news seems to suggest that we are poised for a downturn. True enough, the current bull market is entering its fifth year, and we all know that at some point the gains will reverse into a bear market. The question is when. We’ve passed the fourth year marker – historically bear markets crop up on average about every four years – and there are none of the usual warning signs of an impending market correction. This bull market seems to be jogging along quite well despite all the Cassandras out there looking for bearish indicators as we sailed past the four-year benchmark in March.

Summer used to be a time when individual investors pruned their portfolios – parking cash until fall when equity trading becomes busy again. With some stock prices at record high prices, this strategy might seem very tempting – especially in light of all the naysayers looking for signs of an imminent bear market. Most advisors counsel against overreaction, although it might be time to trim judiciously. Most analysts believe equities are priced appropriately – with very few overvalued. A good many Wall Street gurus believe this bull market has legs.

Some commentators attribute the enduring bull market to a continued upswing in consumer optimism (which recently hit a five-year high) as evidenced by the steady pace of consumer spending. This uptick in consumer confidence has surprised economists because higher taxes were expected to dampen consumer spending. Falling inflation and declining gas prices are helping to spur spending. The housing sector has picked up, and private employment has increased. The extent of the rebound in consumer sentiment has been a surprise at a time when cash-rich companies are playing it safe, and the government is tightening its purse strings. The government’s second of three reports on the first quarter gross domestic product (GDP) is expected to remain at 2.5 percent – a steady if uninspiring rate of growth.

Some financial analysts are hoping to see U.S. corporate earnings deliver solid results for the third and fourth quarters to shore up continued investor confidence in the markets. First quarter earnings were not especially noteworthy and forecasters are expecting better returns for the latter part of 2013.

What are the signs that the market may be headed for trouble? Brokers love to look at past market performance to predict the future. This methodology has major flaws, because the issues we face today and the technology we use make many historical comparisons obsolete. That being said, savvy investors usually stay alert for warning trends. Narrow market performance often is a key indicator. If less than 25 percent of the stocks on the exchange are responsible for the majority of total market gains, it’s not a healthy scenario. Signs of a major economic slowdown – increasing unemployment figures, decreasing manufacturing orders, declining consumer confidence – are also red flags that indicate a bear market might be on the horizon. Currently, none of these are in play. In addition, the Federal Reserve is doing all it can to create a monetary policy favorable to business growth. And so, we should not expect to see inflationary pressure mounting or the dollar losing value – factors that might lead to a bear market.

Although there are no certainties in the stock market, its current performance suggests that we still have some sunny days ahead

As always, the above is intended as general commentary and is not a substitute for the advice of your professional tax and investment advisors.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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