Smart money: Investors cash in on stock market bull run

With the Dow Jones Industrial Average reaching new record highs in recent weeks, some financial advisors have revised their outlooks to project a rosier view for the stock market for the rest of the year.

Sadoff Investment Management LLC, an investment advisory firm in Glendale, was cautiously optimistic for 2013 at the end of last year. But December and January put its advisors over the edge, said Michael Sadoff, investment advisor. The firm released a special report at the end of February touting its outlook shift to “blue skies ahead.”

Signals in the market indicate the current bull market is likely to continue — maybe for several years — and economic undercurrents are strengthening, the report said.

Sadoff follows commodity prices closely, and they plunged in 2008. Those prices recently started to break up again, especially in the industrial sector, Sadoff said.

“That tells us the economy is picking up steam and is going to avoid a recession,” he said. “The stock market just needs moderate economic growth, low interest rates and inflation to do well.”

While some may worry the current conditions suggest the market is close to another peak and the bubble could burst, Sadoff said current conditions do not match historical peaks. The Federal Reserve has kept interest rates low and consumer confidence is low, which are both good signs.

The market will keep moving higher as money comes off the sidelines, Sadoff said. It’s been a bull market since 2009 when the bottom was reached, but the market is just getting back to square one, he said.

“People think that the fourth year of a bull market, that’s really the end of it,” he said. “(But) there’s a lot of slack in the economy and we’re nowhere near overheating.”

Sadoff recommended financial stocks and the housing market for investment, since both are in turnaround mode.

Sara Walker, senior vice president and investment officer at Associated Wealth Management, a division of Green Bay-based Associated Bank, also is bullish on the stock market for the year, but says most of that good year has been handed to investors already.

“Being an investment person and being an investment advisor, I love it when markets are hitting new highs,” Walker said. “At the same time, when you have a good year of stock market performance in two and a half months, it makes a money manager typically a little nervous.”

The tone of the stock market is much improved over 2012, with a sigh of relief from investors after the fiscal cliff and sequester doom and gloom weren’t as bad as predicted, she said.

As a result, investors have turned their focus to underlying earnings and balance sheet strength, Walker said. Employment and corporate strength are improving, strengthening the foundation of the market.

“Any improvement in demand kind of pours right down to the bottom line because companies have really become quite efficient,” she said.

While Walker expects some pullbacks throughout the year, she does not think the market will have a bad year. And in current conditions, it’s a good idea to get some market exposure to benefit from the record highs.

One investor she worked with was convinced the market would go down if Barack Obama was re-elected and held $2 million out of the market until after the election and fiscal cliff negotiations. As a result, that investor missed the market rally.

“If an investor feels he or she should have another 20 percent of their assets in the stock market, I would suggest they put half of that percentage in and just do it,” Walker said. “I respect and understand how difficult that is. But I do think you need to do something.”

Jennifer Green, investment specialist in J.P. Morgan’s private banking office in Milwaukee, agreed that getting into the stock market is the smart play this year.
“Our view, when you wait, it may be a good approach for many things but rarely for an investment portfolio,” Green said. “It isn’t a year to be out of market, it’s a year to be balanced in taking your market risk.”

Green focuses on a strategic, long-term asset allocation plan for clients and moves portfolios around based on market conditions.

“We expect that it’s going to be another year of the market outperforming what economic growth would imply,” Green said. “You have the private sector, the corporate cash on corporate balance sheets, companies are in a much better position today than they were in the last two to three years.”

While her portfolios are fairly neutral in equity exposure, J.P. Morgan has an overweight to the United States. and emerging markets and an underweight to developed international markets.

Meanwhile, some advisors are more cautious about whether the market will continue its bull run.

“I would say we’re more cautious about the markets, just given all that’s going on with our government,” said Michael Hodan, a Milwaukee-based senior financial advisor at BMO Private Bank.

Investors can expect reasonable returns, not substantial returns, he said. But he’s not telling anyone to get out of the market. Instead, clients are being advised to add cautiously in certain areas.

“I would never say a record high is a reason for getting into the market,” Hodan said. “I’m not bearish, I would just say cautious. I think if our government gets past this impasse, we could see nice positive returns, nothing substantial.”

Hodan would add blue chip and international stocks right now. On the fixed income side, BMO is shortening its horizons to reduce exposure because of the potential for rising interest rates.

The impacts of the federal sequester will subdue the market, but the extent is yet to be determined, Hodan said.

“If this continues day after day, week after week and we don’t have any resolution, the more effect this will have on the stock and bond markets,” he said.
However, Abdur Chowdhury, chairman of the economics department at Marquette University, thinks the sequester is already baked into the stock market cake.
“The market has already taken that into account, has discounted it, so I don’t see the sequester affecting the market very much because this discussion has been going on for some time,” he said.

Both Walker and Chowdhury expressed some concern that the VIX, the measure of stock market volatility, has been unstable. That could impact investor confidence. But unlike Walker, Chowdhury thinks the market will do better in the second half of the year as the economy improves.

Chowdhury said he expects slow but modest growth in the economy, probably 2 to 2.5 percent GDP growth.

“Since the economy is getting better, what investors will do right now is take a little more risk than they did before,” he said. “I think the stock market will improve, will get better, but there will be volatility.”

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