Update: read Where to shelter from the storm for more defensive stock tips.
This week, the Dow Jones pushed above 11,000 for the first time since June 2001. It is now sitting at four and a half year highs – as are America’s other benchmark indices, the Nasdaq and the S&P 500 – and is a mere 6% below the record level of 11,722.98 hit in January 2000. So what next?
The optimists are pointing to the fact that the Dow rose every day for the first five days of January, something that, if history is anything to go by, suggests the market has a greater than 50% chance of turning in above-average gains for the year, says The Wall Street Journal.
But so far celebrations have been “muted”. And for good reason. Market watchers are longing for lasting gains, but they also know that the Dow has pushed through 11,000 19 times since 1999 and always fallen back again, and are well aware that the current bull market, now more than three years old, is “elderly, as bulls go”.
The profits outlook is also far from clear. As Greg Farrell points out in USA Today, Wall Street broke at least one record in 2005 – the number of earnings ‘restatements’ was the highest ever, something that should be of major concern to all investors as restatements “raise the question of whether management has been manipulating the numbers”.
At the moment, optimism abounds when it comes to profits – Thomson Financial puts consensus forecasts in the US at 13% for 2006 – but the question investors must ask themselves “is how far these profits reflect a secular improvement in profitability as opposed to an unusually prolonged cyclical high”. If it is the former, most markets don’t look “particularly expensive”, but adjust for a standard cycle and “they look pricey”.
The US bull market isn’t the only one looking “long in the tooth”, says Tom Stevenson in The Daily Telegraph. The same is true of the UK, which means we should expect “more risk-averse investors to head for the security of bigger stocks”.
But this is not the only reason to shift your portfolio towards the “Big Friendly Giants” of the market, say the strategists. The fact that they are cheaper and offer better yields than the mid caps should also be a draw, and thanks to their overseas exposure their growth rates are just as good as those for smaller firms. There is every chance 2006 could be “the year of the corporate BFG”.