US at record highs: Should investors sell up or stick with equities?

The S&P 500’s strong performance through the first 10 weeks of 2013, pushing the index to record highs, means it is already in touching distance of most Wall Street analysts’ year-end predictions.

Barely seven weeks into 2013, the US stock market has risen by 7.97% over the calendar year to 5 March. After a mini-blip in late February, the index touched a new high of 1,543.47, close to analysts' consensus 12 month forecast.

Backing the analysts’ view, investors could almost cash in now, their year’s work almost done. But are there further gains to be had or are the bears concerns about a significant correction justified?

Fisher Investments is one of the most bullish US houses. Eponymous founder and chief executive Ken Fisher, one of the best known financial commentators in America, believes that investors cashing out now risk missing out on a major further leg up.

Citing the classic market sentiment cycle of pessimism from the previous bear market continuing into the early stages of recovery, he believes investors are still between the scepticism and optimism phases, which then give rise to euphoria as the market moves towards a peak.

‘We continue to view investor sentiment as mostly sceptical, not pessimistic, but not uniformly optimistic and certainly not euphoric,’ Fisher said. ‘Sceptical sentiment transforming to optimism increases investor enthusiasm for equities, pushing share prices higher. This is one key reason why we believe the bull market should continue in 2013, with the world’s largest firms leading the way.’

Fisher’s forecast is that equities ‘are most likely to end 2013 up a lot (plus 20% or more)’, with his next most likely scenario a smaller gain, followed by a little or finally large loss.

Both the bull and bear cases for equities are well trodden paths. However, despite fears the Federal Reserve will cut quantitative easing sooner than expected, which sparked a 1.2% sell-off on 20 February and a five day downleg, Fisher is unperturbed. Although there dissenting voices within the Fed, he expects it to continue with its asset purchase scheme for longer than expected, branding QE3 ‘QE-Infinity’.

He also believes that the bear case overestimates the potential impact of the unresolved Federal budget issue, one of the naysayers’ biggest concerns.

He stresses that gridlock in Congress is generally a positive in that more radical policy changes are less likely as compromise is sought.