Moderate to high risk investors often gravitate to the stock market because it gives them the volatility they seek. But big gains can often be followed by big losses if they are not careful about when to invest and sell.
Yet now, many investors who called for a correction in the market a while back are starting to wish they had bought more because it’s starting to hit record highs. Just last week, stocks rose even more. Wednesday, the Dow and S&P 500 closed at record highs.
With all of the gains, you may want to jump into the stock market some more. But should you?
Jeffrey Gundlach, co-founder of DoubleLine Capital and known as the bond king, is now quite bullish on equities. According to Reuters, he recently referred to the U.S. stock market as the “only game in town.”
It’s not only because it’s hitting highs, but also because he expects continued rises in value. But this doesn’t mean he’s rushing out to buy more. Actually, he makes a very good point in saying, “I don’t like buying high.”
Yes, stocks may continue to climb, but at this point, investors won’t make as much of a return. If you didn’t buy into the stock market when it was low, you’re probably much like Gundlach, who really wishes he had bought more back then so he could cash out over the next few months.
With the Fed continuing it’s stimulus, we’ll see lower rates of unemployment and more money being poured into the economy. But right now, consumers aren’t spending as much as they could, as evidenced by many retailers reporting a decrease in earnings.
Three of the biggest retailers right now are Macy’s (NYSE: M), Wal-Mart (NYSE: WMT), and Kohl’s (NYSE: KSS). Last week, the companies reported earnings, and Macy’s was the only one that exceeded expectations. Wal-Mart and Kohl’s disappointed.
The biggest teen retailer, Abercrombie & Fitch (NYSE: ANF), will likely be joining them, as it already warned investors of declines in sales.
There may still be hope. Best Buy (NYSE: BBY) will be reporting its earnings next week, but it’s safe to say the company’s numbers will probably be much more pleasing, since their shares are up 270% this year.
Discount stores such as Ross (NASDAQ: ROST), T.J. Maxx (NYSE: TJX), Marshalls, and the Dollar Tree (NASDAQ: DLTR) are all expected to report good sales. This will show consumers are focusing on stores where they can get the best prices, which means they don’t have as much disposable income.
Let’s take a look at these factors. The Fed continues to report there will be no tapering right now because the economy is still not strong enough to handle it. It wants to see unemployment numbers go down and the economy performing much better than it is, so it is fueling it with money. And as more people start working and making money, they will start to fuel the economy as well. They will start to spend more at retailers, which will then increase these companies’ earnings and potentially your returns.
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So why are stocks so high right now? Some analysts speculate they could be overvalued, which means they will come back down as they correct themselves.
But one thing is almost guaranteed. The U.S. stock market is in the “momentum phase,” as Gundlach calls it, and it will continue to escalate for the near future.
To play this market right, you may want to hold off on purchases right now. You’ll have trouble making too much of a return because prices are so high. (Of course, this may also depend on an individual stock’s performance and potential.)
Remain patient, and watch the stock market decline a bit after the holidays. The holidays have a tendency to push the market up due to commercialization. However, once the dust clears, you’ll see the economy start to show itself in the earnings again.
If the market does decline, that’s when you should buy. The Fed’s stimulus will continue to push it higher overall. Some people believe the Fed will begin to taper in March of next year, but unless there is some huge movement in the economy in the next three months, it will likely be even longer before that happens.
Just know that when the Fed decides to taper, you’ll likely start to see a decline in the market again. This time it will be for real. When easy money is no longer fueling investment, these artificial highs will be no more.
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