Encouraging Performance Cheers Investors

The Dow Jones Industrial Average topped 12,000 – a threshold that had not been crossed since 2008 – as January drew to a close. The excitement proved tough to sustain, however, as the market retreated and then rebounded the following day. The 12,000- point milestone doesn’t increase GDP or boost exports, but it does provide the psychological lift that investors need from time to time. Are we seeing the beginnings of a bull run? Answers range from a qualified “yes” to predictions of future minor market corrections. Whatever their stance on future prospects, most analysts agree that index performance and rallies like the recent one help draw investors from the sidelines back into the equity market. Here’s what some of the influential commentators are saying.

The current low yields from the bond and treasury markets are making the stock market more attractive to investors. The Dow gained 11 percent in 2010 at a time when yields on Treasury notes ranged from 2.5 percent to 4.0 percent. Investors took notice, as evidenced by an influx of equity purchases in November 2010 – a trend that reversed six months of negative flows. The investors who have decided to return to the stock market are doing so slowly, according to market research, and they tend to favor blue-chip stocks.

The 12,000 Barrier
To those investors disappointed that the Dow Industrials stopped at 12,000 and failed to push through, the pros urge patience. Many analysts recognize that the pullback might have been created more by psychological factors than any others. It has been noted over the years that investors place disproportionate importance to round numbers and that these psychological perceptions become self-fulfilling prophecies.

Big Names Rebound; Small-Caps Dither
Companies listed on the Dow are benefiting from investors’ preference for big names, but small-caps have not benefited to the same extent. Trend lines of the Russell 2000 index of small capitalization stocks suggest that over the past two months, the relative performance of the index has been worse than both the Dow and the Standard and Poor’s 500 indices. It must be noted, however, that more Russell 2000 individual stocks have advanced than declined in the past 60 days. Trading patterns also suggest that the most aggressive activity on the Russell 2000 happens when stock prices decline – a bearish trend.

Mixed Earnings Reports
Some experts think we might be due a market correction – albeit not a big downturn. These analysts have noted the U.S. market’s sour take on the recent disappointing GDP figures from the U.K. They predict similarly unimpressive data from U.S. sources. Analysts also note that earnings reports are proving to be a mixed bag, with both Proctor & Gamble and Colgate-Palmolive taking hits after releasing financial reports showing a profit slide of 28 percent for P&G (compared with 2010, which was bumped up by a large gain from discontinued operations); and Colgate-Palmolive’s failure to hit projected earnings targets.

Whether bullish or bearish, experts don’t deny that challenges remain. They note the U.S. is still in a recovery mode, and if unemployment rates don’t decline and/or inflation rears its head, the market’s recent progress could be stymied.

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