Individuals who decided to close their eyes and try to ignore the excruciating losses in 401(k)s and other investments in 2008 and 2009 have to be feeling relieved now.
The Standard & Poor's 500 — or the index that is frequently called the "stock market" — has finally climbed enough to wash away the 57 percent losses that occurred from October 2007 to March 9, 2009. The market is at a record high of 1,569, or slightly above the old record of 1,565, posted before the financial crisis started to yank trillions of dollars away from investors in 2007. With dividends reinvested, investors in the Standard & Poor's 500 index have earned a return of about 12.7 percent since October 2007.
That's a relief from tremendous losses, but earning 12.7 percent over such a lengthy period means people have earned only about enough to keep up with inflation, notes Howard Silverblatt, a Standard & Poor's analyst. Yet the five-year trip back to positive territory is, at least, evidence that even in the worst of markets, the stock market does eventually recover and those who dare to buy stocks at the worst times can earn extraordinary gains. After the stock market hit its most distressing level in March 2009, it climbed 131 percent. With dividends reinvested, the gain was 152 percent, said Silverblatt.
Despite all the hand wringing about the sorry state of American consumers as home values plunged and millions lost jobs in the recession, large U.S. companies that cater to consumers did not wither away. Stocks for companies that sell to consumers — everything from restaurant companies to department store companies — are up 245 percent as a group.
Jobs have been slow to return, and pay increases have been sluggish, but consumers have reduced their savings to keep buying. In addition, government benefits ranging from Social Security to food stamps have helped propel consumers' buying. And the rising stock market has generated optimism and purchases among the affluent.
But what about now? Many individual investors remain leery of the stock market and would like the all-clear before daring to buy stocks at recent record-setting prices. The Standard & Poor's 500 has already climbed 10 percent this year, an unusually strong gain for only three months.
Not surprisingly, analysts, who were reluctant themselves about stocks a few months ago, have been transformed into optimists on the stock market recently. It's not that conditions have changed dramatically lately. In fact, the economy is still only on a slow recovery, and gross domestic product climbed just 0.4 percent in the last quarter of 2012. But the economy has continued a slow slog to recovery, central banks throughout the world keep pouring money into the system, and companies have been clever about increasing profits despite difficult conditions.
Perhaps most importantly, bull markets — or markets when stocks keep climbing — have an intoxicating way of turning even leery professionals into believers even though their training tells them that record highs suggest the stock market may run out of steam in the months ahead.
Many analysts are raising expectations for the rest of the year. Yet, some are also warning investors to expect some temporary declines in the short term, as over-enthusiasm for stocks pushes the prices too high — particularly as job losses rise as the government makes cuts. After stocks sell off, analysts expect stocks to climb again into the end of the year.
Standard & Poor's Investment Policy Committee last week said that the committee now thinks the Standard & Poor's 500 index will end the year at 1,670, or about 7 percent higher from recent levels. Previously, the analysts had expected only 1,550 by year-end.
Its view is bolstered, the analysts said, by the belief that "there will be gradual improvement in global economic growth." In particular, the committee is impressed with the housing market, and expects home prices in the Standard & Poor's Case-Shiller index to climb 8 percent this year.
In an encouraging sign of optimism about housing, 48 percent of Americans recently surveyed by Fannie Mae expect home prices to rise over the next 12 months. Optimistic expectations can be self-fulfilling as people become more serious about buying homes. And if the housing market keeps climbing, that will stimulate the economy somewhat and bring construction workers back to jobs. In addition, more people will be able to refinance homes and free up spending money.
Still, as the economy improves, Standard & Poor's analysts are not expecting the stock market to keep climbing full time to the end of the year. The analysts are expecting corrections, or short-term downturns, that will bring stock prices down to levels that are better reflections of the economy and corporate profits.
"We will see a significant top in the months ahead, but not in the near term," the committee told clients last week.
Meanwhile, Ned Davis Research strategists are cautious enough about a possible near-term correction to prompt a somewhat defensive approach to investing. The firm has added exposure to defensive sectors such as telecommunications while pulling back on basic material and technology stocks, which depend on a fast-growing global economy.
At the same time, however, Ned Davis strategist Ed Clissold said the company's model portfolio is invested 70 percent in stocks, 20 percent in bonds and 10 percent in cash. That indicates confidence that the bull market that began in March 2009 isn't about to end. Typically, the company helps clients decide how to invest by lightening up on stock exposure when stocks seem poised for a major fall. The current 70 percent exposure is the highest the firm uses.