Investing in confidence: Reasons for optimism in U.S. stock market ...

Jon Raynes, a young investor who parked his money in CDs, is ready to try his hand at riskier investments.

6.8%:? Standard & Poor?s 500 index increase in 2012

When it comes to the stock market, Jon Raynes has known only the credit crisis and its aftermath during his adult life, one reason the 22-year-old has played it safe with his investments.

But Raynes said he is finally ready to raise his risk quotient, and the upcoming initial public offering of Facebook, which he uses, is tempting him to jump into the stock market, although not with both feet.

?I have a feeling it?s going to blow up within the first couple weeks, and I want to see how I can come out on it,? he said.

Investment advisers typically urge people in their 20s to take on the most risk, given they have the most time to recover if things go badly.

Raynes, like many Americans, instead has parked his money in certificates of deposit, which yield almost nothing. The Federal Reserve has said it won?t work to raise interest rates through 2014.

Savings deposits, including money-market accounts, in the U.S. topped $ 6.1 trillion in late January, compared with only $ 2.3 trillion a decade earlier, according to the Fed.

Those who have sought safety have had to sit by and watch as U.S. stock markets got off to their best start in 15 years last month.

For the year so far, the S&P 500 has risen 6.8 percent and the Dow Jones Industrial Average 4.78 percent. Typically, when stocks perform well in January, they end the year with a gain.

As often is the case, last year?s laggards are this year?s best performers ? small-cap stocks, bank shares and emerging markets.

Causes for optimism include the strengthening employment market, a falling inventory of unsold homes, rising rents and low mortgage rates, said Paul Dickey, president of INS Capital Management in Denver and St. Louis.

Dickey got more aggressive last October, when markets hit a near-term low. He argues the bull market that started in March 2009 is still intact and that the S&P 500 will get back to its 2007 high of 1,565 before suffering a 10 percent correction.

That would represent another 16 percent gain to reach the high from Friday?s close of 1,342.64.

Cautious investors looking to diversify away from cash and U.S. Treasurys should start with corporate bonds, municipal bonds and higher-quality foreign bonds, Dickey said.

They should also consider putting a small percentage of their portfolio into some of the most volatile parts of the market, he said, with small-cap U.S. stocks and emerging markets, Latin America in particular, worthy of more attention.

Since 2000, the S&P 600 Small Cap index has doubled in value while the S&P 500 Index, a proxy for large stocks, has done only slightly better than breaking even.

Emerging markets have underperformed U.S. stocks for more than two years, and Dickey expects they will outperform on the way back to the old highs.

?Conservative investors should always maintain a balanced portfolio, but not be afraid to commit capital or remove capital around a core strategy centered on the client?s exposure to short-term Treasurys,? he said.

Robert Aliber, co-author of the classic investment book ?Manias, Panics and Crashes? recently told a Denver gathering of University of Chicago business school alumni that the U.S. economy should chug forward even with the ongoing turmoil in Europe and a slowdown in China.

U.S. GDP should benefit from a rebound in housing and a reduction in the trade deficit, growing 3.5 percent to 4 percent this year, much of that coming in the second half, he said.

But not everyone is convinced that ?risk on? is the right strategy.

After 10 percent and 20 percent swings last year, it is hard to get excited about January?s more modest rise in the S&P 500, said Dickson Griswold, president of Highwater Wealth Management in Denver.

?Recent history has made both investors and advisers dubious of rallies,? he said. ?Baby boomers nearing or entering retirement are not eager to repeat 2008.?

From late 2007 until early 2009, U.S. stock markets lost half or more of their value. Debt problems in Europe and the U.S. and the potential of a slowdown in China continue to spook investors, he said.

Just 44 percent of advisers plan to increase their clients? exposure to stocks, compared with 63 percent at the start of 2011, Griswold said, quoting an Investment News survey.

There are other warning signs. Corporate earnings in the fourth quarter are increasing at only one-fourth the rate they did at the end of 2010. And the VIX, a measure of volatility in the S&P 500, has dropped sharply from levels seen last fall.

That means investors have become less concerned about risk, which increases the potential of a surprise to the downside.

Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com or twitter.com/aldosvaldi

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Source: http://www.smnx.com/marketnewsinternational/investing-in-confidence-reasons-for-optimism-in-u-s-stock-market-start-adding-up/

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