The Dow Jones Industrial Average, having climbed 5 percent in the last 12 trading days in December, completed a Santa Claus rally that is expected to continue well into 2014.
Indeed, confidence in the stock market is everywhere. In fact, Investors Intelligence last week reported the highest level of bullishness among investment advisors in more than six years. Following along, the National Association of Active Investment Managers (NAAIM) reported that the three-week-average equity exposure among its members increased to its highest level ever.
And my colleague Doug Davenport provided a detailed explanation in his Dec. 31 Money and Markets column about the massive breakout to the upside that has occurred in stocks since the lows in 2009.
|High-quality companies with global distribution footprints and deep liquidity profiles should form the core of your investment portfolio.|
This is perhaps a new kind of speculative bubble that’s happening for mostly the wrong reasons. Which means the risk of a correction is rising.
But there are many forces behind the momentum, forces that are gaining strength:
Massive money printing. As Mike Larson has pointed out, the Fed has begun to tinker with tapering. But it’s still continuing to inject massive amounts of paper money into the U.S. economy; and incoming Fed Chairman Janet Yellen will do no different. If the taper causes a market setback, her response will be immediate. So no matter which way you slice it, the Fed has vowed to pursue and sustain the most aggressively liberal monetary policy in U.S. history.
The U.S. economy is finally improving. Whether it’s improving fast enough is still unclear; and whether it’s because of the Fed or despite the Fed also remains to be decided. But while these debates are bound to continue, the fact is that the economy is showing signs of improvement.
Medium- and long-term interest rates have begun what appears to be a major, secular uptrend. That means the market value of medium-term notes and long-term bonds are going down and will continue to do so. How and when this impacts other sectors is still unclear. But the reality is that huge amounts of money are moving from fixed instruments to stocks.
Gold is still not booming. Yes, it may be bottoming. And yes, at some point in the future, inflation could begin to drive a good deal of money into precious metals. But, currently, the yellow metal is in the doldrums.
That’s why these pragmatic realities — not optimism or pessimism about the long-term future — should be your primary consideration when making your investment decisions.
No, you can’t ignore long-term trends or ever let your guard down about the dangers — hidden or apparent — that I’ve written about in previous Money and Markets columns. And, there’s no doubt we are indeed living in uniquely unusual times.
But you can still profit by being pragmatic and following these three simple steps:
Step 1: Recognize that 2013’s dominant trends of an improving economy, rising U.S. stock prices and rising interest rates are likely to continue at least through the first part of 2014.
Step 2: To profit from these trends, use investments that are liquid and easy to buy or sell at a moment’s notice.
Step 3: Check the Weiss Ratings and buy only those with high Weiss ratings for safety and consistency.
That’s why I am suggesting that companies with global distribution footprints, high-quality characteristics and deep liquidity profiles form the core of your investment portfolio. And as an added boost to returns and to provide downside protection in the event of a market pullback, look for growing companies that pay a dividend in the range of 2 to 3 percent.
Check out our Facebook page to find one of the stocks that I am currently recommending.
P.S. To see how my team and I are investing America’s wealthiest families’ money in these tricky times, click here. And you’ll learn how you can shadow every move!