Did you get spooked -- or burned -- by the financial crisis of 2009? You're definitely not alone. If, like many Americans, you've spent the last few of years waiting it out on the sidelines with low-interest bearing fixed income securities while the Dow has gained an average of 22% a year since the crash (as of November 2013), you may be wondering whether it’s time to get back into the market.
We hear this question often, and while you may have – understandably – lost your faith, signs point to a healing market. Here’s why.
Don't Trust Your Investment Professional? You're Not Alone
We get it: American investors have had a really rough ride. In the last decade, we’ve seen two of the worst bear markets in history, numerous scandals within major brokerage firms, and many cases of fraud in the financial industry. Then there’s the fact that Wall Street’s abusive practices have largely gone unpunished.
Given recent events, it’s no surprise that the financial services industry is the third most hated industry group in the U.S., only surpassed by the federal government and big oil. So while the mere thought of working with a financial advisor or investing in the market again may make you queasy, don’t throw in the towel quite yet. There’s a better way to do it.
You Can’t Believe Everything You Hear
Keep in mind that since the Dow hit its low in March 2009, it’s more than doubled. The more-representative S&P 500 has posted even more impressive gains of 155% (as of October 2013) since it bottomed out. Other than the strong market performance, other factors indicate that there’s a light shining at the end of the tunnel.
Negative investor sentiment is perpetuated and compounded by the financial media, whose goal is to play on emotions such as fear and greed in order to get those ratings ever higher. But while media pundits continue to remind us of how bad things are, the market is skipping to a different tune.
Corporate Balance Sheets/Earnings
Global corporations have been in balance sheet repair mode, reducing debt and leverage while streamlining operations and improving efficiencies. Earnings reports have been constructive overall, with many S&P 500 companies exceeding analyst estimates. American companies have several trillion dollars of cash that, when deployed, should impact the economic system and the markets.
Mergers and Acquisitions
Companies are putting cash reserves to work: Merger and acquisition activity is on the rise, with more than $882 billion in deals completed in 2012 alone. Strong merger and acquisition activity suggests that corporations are feeling confident and are willing to make significant investments to increase shareholder value. While the media claims that companies are hoarding cash – which is likely true to some extent –numbers indicate that the hoarding argument is exaggerated.
While some argue that stock buybacks -- when a company repurchases its own stock from shareholders-- indicate that a company has limited growth opportunities, others claim that buybacks show confidence among corporate management. When a company feels its shares are undervalued – the most common publicly cited reason for buybacks – it will take shares off the market. Given constant demand, a lower supply of shares should lead to price increases; it’s Econ 101.
Share buybacks, which totalled $286 billion in the first two quarters of 2013 alone, are up nearly 88% since 2012. This refutes the hoarding argument and shows companies’ willingness to use reserves prudently.
Wealth Planning and the Healing Process
Despite the constant doom and gloom from the press, these signs indicate that the markets are healing. While it’s true that our nation faces significant challenges, none of these are secret to the markets – and that means that market prices already reflect the impact of these challenges, so they won’t have any further impact until the collective wisdom of the market becomes either more optimistic or more pessimistic about the future.
Investment Professionals: To Trust or Not To Trust
Now we’re back to our original question: Should you trust the stock market? In a nutshell, yes – but trust it in a better way.
If you’re tired of earning next to nothing on your money as the market continues to push higher or if you are looking for a way to get back into an investment portfolio, you can ease back in a way that allows you to avoid the common blunder of placing all your assets at the wrong time.
Take some time to look at your options. There are proven ways to minimize the risk in your portfolio while maximizing your odds of having a successful long-term investment experience.