When is joining a bull market asking for trouble?
Wouldn’t it be great if the stock market was just more straightforward? When individual investors wait out an iffy market until stocks seem strong enough to buy, a decline could be imminent. Or, says James Angel, an associate professor of finance at Georgetown’s McDonough School of Business, “since there are still plenty of people still on the sidelines, it could be a sign that the great bull market is going to get even stronger.”
Angel notes that participation in the stock market is still far below where it was five years ago, which means there are still many investors left to start buying stocks again. And he says, figuring out exactly when the market will peak is, at its very easiest, difficult.
“When the market goes up it’ll often overshoot and go above the fair value of the market,” he says. “And when the market goes down it’ll overshoot on the way down and often go below the fair value of the market. Calling the turning point is the hardest thing to do.”
Scott Wren, senior equity strategist at Wells Fargo Advisers, says a flood of individual investors entering the market can be a sign a bull run is over, but that’s not what’s happening here.
“Money is starting to move in, but I would not agree – when you read some headlines out there that money is pouring in from retail investors – we’re not seeing that from our clients,” he says.
Wren notes while we may see more volatile trading, there’s only a slim chance of another recession in the next couple of years. He expects the bull market to continue through 2016 – though a little less bullish. Gregory Miller, chief economist with Sun Trust Banks, agrees that the market may continue its course, though tempered slightly.
“Now, the prospect of continued 20 percent annualized returns may be coming to an end,” he says.
If you are looking for a safe place to park your cash, says Miller, look for stocks that are tied to the economy, like industrials.
The worst thing to do,” says James Angel, speaking about potential individual investors who may only now be buying into the stock market, “is to chase what was hot last year.”
If a stock was really hot last year, notes Angel, chances are it’ll have cooled off by now. Instead of looking to the past, he says to focus on the future — thinking about investment objectives, time horizons and risk tolerance, especially while interest rates are so low.
“Right now,” he says, “we’re in a low-return environment, so making sure you don’t do something stupid is the most important thing. “
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