After the market has risen 50%, is it still safe to invest in shares?
At a guess, right now I reckon the stock market bears outnumber the bulls by a ratio of about 3 to 1.
Mind you, I can't recall reading of a leading investor selling up everything, going to 100% cash, and sitting back and waiting for the next great stock market crash.
The bears instead are using different strategies, such as…
- investing in gold, or in gold mining shares;
- shorting gilts or US Treasuries, betting on increased inflation in the not too distant future;
- investing in blue-chip high yielding shares like GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN), as is top UK fund manager Neil Woodford; and
- shorting banks, especially the government-controlled variety like Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY), on fears of increased regulation, a double-dip recession, huge capital raisings and/or falling property prices.
Not All Bears Are Alike
But not all bears agree. Some are bearish, yet avoid gold as, unlike cash, its yield is zero percent. Others think we're in for a bout of deflation rather than inflation, and would be more likely to buy gilts rather than short them, or they prefer high-yielding oil majors like BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) to the pharmaceutical giants.
Then there are bears like economist Andrew Smithers, who recently said on Bloomberg that the US market is overvalued by 40%. His reasoning is that the money-printing strategies of central banks like the Bank of England are propping up asset prices, and once it ends (as it inevitably must), those asset prices will tumble. And as we all know, through recent experience, when asset prices fall, all asset prices fall, including share prices.
Bully To You
Then there are the bulls. Their arguments generally go along the lines of…
- the stimulus money being pumped into global economies will eventually find its way to increased corporate profitability;
- companies have cut costs back to the bone, and only small increases in sales will have an exponentially large impact on corporate profits;
- there is still a wall of money sitting on the sidelines, just waiting to come back into the market; and
- with interest rates close to zero, and set to stay that way for an extended period of time, the stock market is relatively attractive.
I think you get the message. Everyone has an opinion about the future, and everyone is trying to make a buck or £10 million. That's why we're ultimately in this investing game -- to use the money we have to make even more money.
The Huge Dilemma Now
And that's where the huge challenge comes in right now… to invest in the stock market or not, that is the question.
I don't have any obvious answers. The bears may be right. We may be in for some dark days ahead. The US market, and therefore likely the UK market, may fall back 40%, undoing all the good work of the past seven months, and more.
But what are the alternatives?
Going to cash, although a great capital preservation strategy, requires you to get the timing right, and to give up earning any income at all from your assets. And that's why many people are sticking with the stock market -- the alternatives are unpalatable.
You can earn a risk-free 0.5% in the banK or you can earn 3%, 4% or 5% dividend yields by investing in the stock market, with the added chance of capital appreciation or capital depreciation.
Fence Sitting
I favour a mixture of strategies, keeping a decent amount of cash on the sidelines for potential buying opportunities, and investing in high-yielding blue chip companies.
Call me a wimp for sitting on the fence, but I find it difficult to predict the future at the best of times, and today the future is arguably more clouded than ever. All I'm looking to do is to make a buck or two.
More on the economy and the markets:
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> Bruce Jackson doesn't have an interest in any of the companies mentioned in this article.
