Year 2009 has been tough for many investors. Investors who panicked in March and fled from equities to cash have watched their monies earn abysmally low returns while stock prices took off. The S&P 500 is now up 64% from its 2009 bottom, making it difficult for cash-laden investors to decide if it is right to return to equities.
Investor confidence is fragile. Fears of inflation are running high. Gold recently broke through the $1,100 per ounce mark. Meanwhile, corporations continue to layoff workers and the U. S. unemployment rate stands at 10.2%, the highest since 1983.
The gross domestic product expanded at a 3.5% annualized rate in the third quarter compared to the 6.4% decline in the first. Increasing for six straight months, the Conference Board’s index of leading economic indicators (LEI) has now risen at the highest six-month rate since 1983.While the recent run in equities could be due for a pause, I believe the odds of equity prices breaking through the March 2009 lows are relatively remote for the following reasons:
- Although gold has surged due a weakness in the U. S. dollar, inflation expectations have not gotten out of hand. The implied 10-year inflation rate based on Treasury yields is a palatable 2.1%.
- The 4-week average of initial jobless claims has now declined to 523,750 from 657,250 in April. The number of temporary hires has also ticked up for three straight months. These data suggest that the rate of layoffs is moderating and employers are now willing to add to payrolls at least on a temporary basis.
I believe the more likely scenario is one of equity prices going sideways for sometime before the bull market gets another leg up. As such, it is good time to be in equities if one has a time horizon of three years or more.
So, how does one invest in the stock market based on this scenario?
Mutual fund investors. Dollar-cost averaging into no load, diversified mutual funds with stable management, modest expense ratios and minimum investment requirements, and strong performance is a low-maintenance way to get back on track. The Yacktman Fund (YACKX), a AlphaProfit Fund Guide pick and Fidelity Low-priced Stock (FLPSX) are examples of mutual funds worth investigating.
Sector fund and ETF investors. Investors who prefer to be somewhat more involved with their investments can target sectors and industries likely to play catch up and outperform the broad market. Laggards like health care are a good place to start the homework.
The potential impact of higher volume and lower margins from health care reform now appears be a more of 2011 rather than a 2010 issue. Fidelity Select Health Care (FSPHX) and Healthcare Select Sector SPDR (XLV) are two investment vehicles that provide broad exposure to the health care sector.
Stock investors. The 2009 bull market has favored lower quality stocks over higher quality ones. Investors who like to be actively involved with their investments can target good quality stocks trading at attractive prices.
The health care sector is rife with high-quality laggards. Shares of managed care giant UnitedHealth Group (UNH) have just managed to nudge their way above the flat-line in 2009 after the company reported a 17% upside EPS surprise.
Looking beyond health care, Darden Restaurants (DRI), the operator of Red Lobster and Olive Garden restaurant chains and aerospace & defense firm Raytheon (RTN) are two more names worth studying.