CHICAGO, Feb 1 (Reuters) – Whenever there is an extended
rally in the stock market, blazing lights go on in the heads of
Main Street investors, signaling that it is time to join the
As the S&P 500 reached a five-year peak at the end of
last week, on top of a 13 percent gain for the index last year,
enthusiasm for stocks approached fever pitch. More than $55
billion in new cash flooded in to stock mutual and
exchange-traded funds in January, according to TrimTabs
Investment Research. That is the biggest monthly inflow on
record, beating the previous record set in February 2000.
What to make of this exuberance? Investors are seeing a
clearer horizon after the “fiscal cliff” came and went without
hurting the market. Pending home sales took a dip in December,
but were up nearly 7 percent for the year, according to the
National Association of Realtors. Corporate earnings also look
relatively strong, with earnings growth of 2.5 percent expected
in the fourth quarter of last year, reports Factset Research. A
renewed prospect of personal wealth is piggybacking this
But it may not last.
Main Street apparently has not received the message that
more troubles for the U.S. economy and federal budget may lie
ahead and derail the stock rally. While U.S. economic activity
is generally rebounding, the economy actually contracted in
December as government spending dipped, the Federal Reserve
reported on Wednesday. It could recede even more if the planned
sequester budget cuts go through.
That is why investing in the stock market should be less of
an on-off switch and more of a dimmer. You can gradually ease
in, making sure you are getting in the right way. It is all too
easy to set yourself up for a fall again.