"The market rises on a wall of worry." For those who bailed out at some point during the downdraft, it's now a "wailing wall."
Those folks have missed the "snapback," and are gnashing their teeth trying to decide when, if ever, to expose themselves to risk again. Current statistics reveal that investors still have 43 percent of their money in fixed income (cash or bonds) and this is after a 62 percent rise in market values since March.
By comparison, at the top of the market, both in 2002 and 2007, that percentage was only 30 percent. Fear of the unknown, heightened by the year's earlier specter of a worldwide collapse, has left people on the sidelines who could be better off if more fully invested.
For anyone wondering what may happen next, the best we have is an educated guess. Any changes in daily stock market values represent a delicate balance of collective educated guessing. What we do know is that trepidation on the part of the investing public sets the stage for future market gains, absent of any unforeseen calamities. The amount of money in cash today earning nothing is like a nuclear reactor about to come on line. All we need is a little more evidence of an economic turnaround to send major portions of the cash that's left back into equities.
Based on Norm Fosbach's Stock Market Logic, history tells us that we can look forward to a 24 percent gain in the next 12 months and a 79 percent climb over the next five years. The latter is an annual rate of 12 percent and this is in line with historically-higher rates of return that follow a major decline. When Warren Buffett suggested five years ago that the market would only gain at an annual rate of 7 percent over the next 10 years, it would have to rise by 12 percent over the next five years (given what has happened lately) for his assessment to become a reality. While applying different time frames, Norm and Warren wind up at the same end point.
Anyone can go nuts trying to second-guess major future events that might derail this encouraging scenario, but several forward indicators predict that we will have a "u-shaped" resurgence rather than a "v-shaped" one that could turn into a "w-shaped" or future depression. The latter happened in the 1930s, but few expect it to happen this time around.
Ken Fisher, whom I buttonholed at a social function, explained that our economy now includes a world economy. This time it's different. For starters, emerging market stocks 10 years ago only made up 4 percent of the world stock market. Today, they constitute 26 percent of the world's market capitalization.
A cheaper dollar, which everyone frets about, will make our products easier to sell overseas, boosting our economy in the process. Today, our largest 500 companies generate 35 percent of their revenue from overseas sales. A cheaper dollar could boost that revenue to a level that more than offsets the dip in domestic sales. Meanwhile, the inevitable inflation will reduce the cost of paying back government debt. It will also help to boost stock and real estate values.
Probably the best investment right now is a first or second home. With housing prices beginning to rise and fixed mortgage rates at a low, it is a historic opportunity to purchase the investment that typically offers its best performance during an inflationary cycle. Meanwhile, the Chinese and Japanese who hold so much of our government debt aren't going anywhere. What could they possibly gain by wrecking the U.S. economy? Let's face it. Things are looking up.