Will investors ride bull market?

Though stocks soared in 2012, investors stayed on sidelines. Will the bull market of early 2013 lure them back into stocks?

Richard Drew/AP
Traders work on the floor of the New York Stock Exchange, Friday, Jan. 25, 2013. The S&P 500 index closed above 1500 for the first time since 2007. Will the bull run convince investors to get back into stocks?

Although Matthew Tuttle had been down on the stock market for some time, he's recently changed his tune. In late 2012, the Stamford, Conn., money manager began urging clients to pull money out of cash and put it into stocks.

"Equities are the ticket for 2013," he says, and over the next three years, the Standard & Poor's 500 Stock Index could reach a record 2000. "Given what investors experienced over the last decade, that gain would be huge."

But many of today's investors may not benefit. Even as the stock market rallied last year, data show many investors were choosing to play it safe, pouring money into bonds or keeping it in cash. Will 2013 be the year they rethink that mode, with the market on a tear. On Friday, the Standard & Poor’s 500 Index rose 8.1 points, capping an eight-day 2.2 percent surge that represents its longest rally since November 2004. The S&P and the Dow Jones Industrial Average have climbed to pre-recession levels not seen since 2007.

"A lot of investors have missed the stock market's move from its '09 low," says Scott Wren, a senior equity strategist at Wells Fargo Advisors in St. Louis. "It's not been like in the past when retail investors would wait for market pullbacks to try to buy." Having twice seen big drawdowns in their portfolios since 2000, some of them probably "are a little paranoid about getting back into the market."

There are reasons to be wary: recession in Europe, sluggish growth in the United States, and looming cuts in US government spending. Moreover, after the rally in 2012 and early 2013, some wonder how much more gain can be expected this year.

Such concerns may explain why many retail investors remain noncommittal. Despite a banner year for stocks – the S&P 500 posted a 16 percent total return, its best showing since 2009 – many investors headed in another direction. Bond funds tracked by EPFR Global, amutual-fund tracker in Cambridge, Mass., drew a net inflow of $476.1 billion in 2012; stock funds it follows posted a $61.6 billion outflow.

So why embrace stocks now?

Stock proponents point to a number of factors, such as expected modest further gains in the US economy; continuing low interest rates; strong balance sheets among many US companies; better than expected earnings; and signs of a pickup in China's economy. These positive forces have already pushed up the S&P 500 up 5.4 percent this month. Mr. Wren says the index could be up 10 to 11 percent for 2013. That's far better than the returns cash or government bonds are likely to achieve.

Global equities should be "the best performing assets class in 2013," says BofA Merrill Lynch Global Research. In a December report, it said gains of 10 to 16 percent were possible for US, European, and Asian equity markets, with the S&P 500 possibly hitting an all-time high 1600 by year's end.

When it comes to stocks, here are three areas investors should consider:

  • Emerging markets, especially those in Asia. Gains could reach 10 percent this year versus "more modest returns" from the US market, says Bruce Bittles, chief investment strategist at Robert W. Baird & Co., in Milwaukee. He is less bullish than many, suggesting that investors allocate only 55 percent of their portfolios to stocks.
  • Economically sensitive US stocks. Wren prefers such sectors as materials, including producers of diversified chemicals and paper products; consumer discretionary stocks, such as general merchandisers and businesses in home improvement; and technology, including communications equipment firms and information technology consulting and services. Conversely, he suggests being underweight in utilities and health care.
  • Dividend-paying companies. "A big investment [strategy at our firm] is to select dividend-paying stocks and to weight them in the portfolio based on the dividends they pay. Those that pay out the largest amount in dividends get the biggest portfolio exposure," says Luciano Siracusano, chief investment strategist at WisdomTree Investments, headquartered in New York. Despite the rise in dividend tax rates for high-income Americans this year, he says that historical data show that "taxes don't have a big impact on the market [including dividend payers] over the long term."

Dividend payers, especially companies likely to boost that payout, are also a big theme for Chris Brown, chief investment officer of Pax World Funds in Portsmouth, N.H. Among the companies he likes: Plum Creek Timber, a real estate investment trust, with a dividend yield of just under 4 percent, which should benefit from a strengthening housing market; Ford, which is likely to increase its dividend as sales improve; and pharmaceutical companies Pfizer and Bristol-Myers Squibb. Although he currently favors US stocks, he also likes London-based Vodafone, with, among other attractions, its 5.8 percent dividend yield.

If stocks continue to gain this year, more investors might switch to equities.

"In 2013, investors might start changing their minds" once they've seen the big premium stocks delivered over bonds last year, Mr. Brown says. But a more compelling driver could be an interest rate rise, which could begin in 2014. Such a move would lower bond prices and add to stocks' appeal.

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