By SIMON CONSTABLE
Like the host of "The Price Is Right" TV game show, Wall Street is saying "Come on down!"
Investment professionals are anticipating an influx of income- and growth-hungry mom-and-pop "retail" investors into the stock market this year—especially as the economy picks up and pressure grows for interest rates to start rising.
"The key is that equities have been hated for so long and the negatives are largely well known," says Barry Ritholtz director of research as New York-based financial-services firm Fusion IQ. "Positive data would be an upside surprise to the bulk of investors."
For years, individual investors have fled stocks in favor of bonds or money-market funds. And who can blame them after the financial crisis crushed share values in 2008 and early 2009?
From April 2009 through now, mutual-fund investors sold a quarter trillion dollars in stock funds, according to recent data from the Investment Company Institute.
Ironically, that selloff coincided with a period of stellar performance in stocks—when the Dow Jones Industrial Average jumped more than 60%.
And the party keeps going. In the first full week of January, investors plowed close to $15 billion back into stock mutual funds. The Dow rose again last week; it's up 4.2% since Jan. 1. The Standard & Poor's 500-stock index is up 4.2%, and the Nasdaq Composite has risen 3.8%.
Bonds and money markets rarely can match performances like that. "Fixed income is yielding rates [of about 2%] that will not get it done," says Stephen Wood, chief market strategist at Russell Investments.
The stock market's upward trajectory seems likely to continue. The economy is on the mend. Jobs are more plentiful and housing prices (a key to the wealth of many households) are firmer. As the general economy improves, pressure on interest rates will increase, and as rates rise, bond values will plummet.
"Many investors do not understand what happens to a bond fund when rates rise," says Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.
Many people may be now willing to take on the risks that the stock market presents as they seek better returns.
But buyers, beware: Stocks are not risk free, and small investors are notoriously bad at timing the market. Small investors retreated as stocks rose, and often when small investors start coming back into the market, it can be seen as a bad sign—a market top.
So if you are tempted to boost your stock exposure, remember: Buy low, sell high. The market has a lot of catching up to do. Even at today's loftier levels, the Dow remains below its 2007 peak, while the Nasdaq stands 38% below its all-time high of 13 years ago.
"We've bled so much money out of equities that we have a very long way to go before we get to the point where everyone who is going to buy stocks has done so," says Bill Stone, chief investment strategist at PNC Wealth Management.
However, anyone jumping back into the market needs to understand that it won't be clear sailing. Here's what you need to watch out for:
After half a decade in the doldrums, housing could be on its way back.
This could actually form part of a virtuous circle. Housing had for many years made up the bulk of household wealth in the U.S. As prices improve, homeowners will feel wealthier once again, leading them to spend more money—creating more jobs and more spending.
Here are some housing facts to warm your heart.
Nationally, prices of previously owned homes jumped 10% in the year through November 2012, according to data from the National Association of Realtors. And they are likely to continue to do well because inventories of properties for sale are low.
The recovery in the sector will go beyond making home builders extra cash, says Neil Hennessy, chief investment officer at Novato, Calif.-based Hennessy Funds.
"In the housing market, there has been a lot of deferred maintenance," Mr. Hennessy says, adding that as housing prices have started to lift homeowners see an incentive to spruce up the place with a coat of paint on the walls or some new carpet.
With that trend in mind, he points to home-improvement retailers Lowe's (LOW) and Home Depot HD (HD), which would likely benefit. Other companies that could do well are appliance company Whirlpool (WHR) and carpet maker Mohawk Industries MHK (MHK).
"I think we are going to see some economic road blocks coming from Europe," says Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
Germany, Europe's biggest economy, saw an economic contraction in the fourth quarter of 2012. If that continues into the first quarter of this year, the country would officially be in a recession.
So what? That could really hurt American industry. As the European economy weakens, you can expect the value of the euro to weaken against the dollar—making U.S.-made products more expensive and less competitive.
If that happens, avoid U.S.-based manufacturing companies, but look to European stocks because their goods and services will be cheaper for the rest of the world to buy. The trick is to find an investment vehicle that allows you to benefit from surging stocks but that isn't offset by the falling value of the currency.
Mr. Ablin points to the WisdomTree Europe Hedged Equity (HEDJ) exchange-traded fund, which invests in a basket of European stocks.
The Ugly—the Government
The really ugly stock-market scenario could be one birthed by our elected representatives.
"In modern history this could be the first congressionally induced recession," says Mr. Wood of Russell Investments.
What he means is that if Congress can't come to an agreement about how to avoid automatic spending cuts (known as "sequestration"), government spending will drop, and the economy will contract.
If that happens, stocks will certainly suffer in the short term.
To deal with that, take a deep breath and don't sell when you see stocks falling. In all likelihood, a deal will get done and those temporarily lower stock prices will look pretty good.
See original story here.