Miller: Stock markets affect the economy, so what lies ahead?

As a financial advisor, I get asked a lot of questions. People expect that I will provide quick yes or no answers, whisper the name of the next big stock, or be able to predict the major market events.

It's not that simple. I can look at indicators, look at the past, and give you my opinion based on experience and knowledge. Here are a few questions I get asked a lot.

(Q.) What's the market going to do?    (A.) It will go up or down.

(Q.) What do you think of gold?          (A.) It looks nice as a necklace or bracelet.

(Q.) What are your favorite stocks?   (A.) The ones that make money!

(Q.) What do you think about Jim Cramer?     (A.) . . . . . .

Those are fun answers to serious questions. But financial advisors must be careful what they say and how they say it. For example, I may say we really like Caterpillar stock. But a person on a fixed income, spending down their principal with no way to earn additional income, should probably not buy Caterpillar stock no matter how much we like it. Such a person may not be able to afford the possibility that we may be (gulp), wrong. So, as we share our opinions on things, especially in written form like this, know that you should not heed any of our advice on your own without first doing a complete financial plan with someone you believe knows what they are doing and has your best interest in mind.

What is on investors' minds these days? For one, the U.S. stock market as represented by the S&P 500 has been going up. Will it continue? If you are not in yet, should you invest? Or will it drop 10 percent as soon as you put your money in?

I believe the stock market will continue to rise over time as it has over the last century, as long as the rules of the game don't change dramatically. In the short term (one to 12 months) the major market averages appear fairly valued. I base that on the reasonable price-to-earnings ratio and an attractive earnings yield versus the 10-year treasury.

I also believe that stable to rising interest rates will not go high enough to stop economic growth to the point of recession any time soon and that the Fed will quickly re-stimulate if economic indicators start leaning that way.

Finally, there is the advantage of a cash-heavy balance sheet in both the corporate and retail investor arena. With interest rates low it makes little sense to leave it there. As long as our stock market is stable to higher, confidence should continue to build and more cash will likely find its way there, supporting prices.

Indeed, for the first time in years there have been positive money flows into equity funds. Money is also moving to alternatives (investments other than stocks and bonds), and non-U.S. Government fixed income (global and corporate bonds, etc.). That is good to see. The perceived "safest" asset is currently at risk of losing value – that being U.S. Government bonds. They go down in value when U.S. interest rates rise, which they did significantly over a recent six week period when the 10 year treasury went from 1.6 percent to 2.6 percent. In light of the recent changes in the bond markets, it is important check your investments to see if a rebalancing makes sense for you.

Back to the market, I don't expect anything more than normal stock market corrections of 10 percent to 20 percent. No one knows when that will happen, you won't know it happened until it happens, and by then it is usually too late to take action to avoid it. Reactionary and emotional impulse after the fact can be as damaging as the event itself and usually worsens the affect. It also tends to be worse when you have more in the market than you should.

Determining how much you should have in the stock market is an exercise that requires a full financial review. If that has been done, you may consider the following strategy: Invest half of what you think you would like in the market now and dollar cost average in with the remainder. An example of dollar cost averaging is to add 1/12th of what you want to invest every month for the next year. But if the market declines 10 percent go ahead and put in the remainder.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. You should consider your ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

I hope you enjoyed this read and will find ways to personally benefit from it. I'll leave you with the answer to that other commonly asked question. What do I think of Cramer? I like him! And if Seinfeld didn't want him barging through his door, why didn't he lock it?

The opinions expressed in this material do not necessarily reflect the views of LPL Financial and are for general information only. This is not intended to provide specific advice or recommendations for any individual. Securities referenced are for illustrative purposes only. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

About the Author

Bob is a Peoria native, a graduate of Peoria Richwoods with a BA in Economics from Indiana University in 1987. He became series 7 registered in 1988, then received his Principals registration (series 24) in 1995 with LPL Financial, the nation's largest independent broker dealer*. He remains an LPL Registered Principal and is also president of Investment Strategists at Better Banks. Bob believes in community service, supports qualified charitable causes and is a Paul Harris Fellow Rotarian. His personal mission is "To make a positive impact on every person I come in contact with." *As reported by Financial Planning magazine, June 1996-2013, based on total revenue.