Are markets (finally) on the rebound?
“Be fearful when others are greedy, and be greedy when others are fearful.” Warren Buffet isn’t known as the Oracle of Omaha for nothing. And it’s hard not to think of those words when looking at current stock markets.
The question is whether the ratio of greed to fear is right for what some pundits have already dubbed The Great Rotation — the shift of billions of dollars of cash back into equities.
As stock markets re-gain momentum, the price of fear is rising.
Certainly the “f” word that has dominated investor sentiment since the 2008 global financial crisis is still very present. But the nature of that fear is subtly changing in 2013, morphing into the fear of missing out on a rally that seems to be gradually gaining ground.
For the past five years, investors have been huddling together in the shelter of fixed income products and cash (where historically low interest rates have generated negligible returns). But there are signs that the worst of the storm has now blown through and it’s time to emerge and start the job of re-building wealth rather than dodging risk.
Equity advocates are already declaring the first month of this year to be a bellwether for 2013: cash came off the sidelines, global stocks were up almost five per cent for the month and the S&P 500 Index was up 5.2 per cent, posting its best January since 1987.
Furthermore, the Dow Jones Industrial Average is flirting with new highs and the S&P/TSX Composite has now recovered all the ground it lost in 2008 and is up 7.2 per cent for 2012.
Even more significantly, U.S.-based equity and mutual funds and exchange traded funds saw the return of over $30 billion in January — one of the strongest performances on record and the highest four-week total since 2000.
What’s especially noteworthy is that all of that momentum was generated in a period when the U.S. fiscal cliff crisis dominated headlines and the eurozone crisis was in another of its seemingly endless iterations of anxiety and despair.
It may be that the living in a chronic state of crisis has finally desensitized investors. Or that the perception now prevails that there can be no more surprises on the downside. In any case, the stock market buzz is back. And strong corporate profit reports over the past two years aren’t hurting investor sentiment either.
However, before galloping back to the feeding trough, it’s crucial to consider that every market recovery — just like every market crash — has its own unique catalysts and characteristics. Before re-entering the stock market, it’s absolutely imperative to thoroughly analyze what has changed over the course of the downturn and why.
For Canadians, that process has to start on their own front porch.
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