Daily Gains Letter

Bull or a Bear, These Investment Management Techniques Could Save Your Portfolio

By for Daily Gains Letter |

140313_DL_zulfiqarThe S&P 500 is closing in on its all-time high—1,575 reached in October of 2007—but the question among stock market investors remains: where’s the index going next?

As the S&P 500 is recovering from the aftermath of the financial crisis, many opinions are being thrown around.

Take a look at the chart below that shows the trajectory of S&P 500 over the past 30 years.

dl_03142013_chart 1Chart courtesy of www.StockCharts.com

The Bulls’ Argument

The bulls argue that the S&P 500 is going to head much higher. They are focused on economic growth and the performance by companies on key stock indices in the U.S. economy. To give you some idea, according to FactSet, in the fourth quarter of 2012, companies on the S&P 500 reported an earnings growth rate of 4.1%. (Source: FactSet, March 8, 2013.)

Looking at current economic conditions, things are much better than they were before. The unemployment rate has certainly declined since the dark years of the financial crisis in 2008. In February, the Bureau of Labor Statistics reported that there were 236,000 new jobs created in the U.S. economy—and the unemployment rate reached 7.7%. (Source: “Economic News Release: Employment Situation Summary,” Bureau of Labor Statistics web site, March 8, 2013.) The unemployment rate is 23% lower compared to the 10% seen in the midst of the crisis. The bulls argue that now that Americans have jobs, consumer spending will increase. As a result, companies will sell more and earn more, and the key stock indices will reflect the results.

The Bears’ Argument

The bears have data to show the S&P 500 is headed lower. While the companies on the S&P 500 may have done well in the previous quarter, they reported negative growth in the third quarter of 2012—for the first time since 2009. Looking ahead, their performance doesn’t look so shiny, either. So far, 107 S&P 500 companies have issued corporate earnings outlooks for the first quarter of 2013—77% of them, or 82 S&P 500 companies, have provided negative outlooks. The expected earnings growth rate for the first quarter of 2013 is also negative. If corporate earnings drive the markets higher, then there’s simply no reason for this market to head higher.

Moreover, the conditions in the U.S. economy haven’t improved as much as some may have thought they would. The number of people who are unemployed—12 million—is still very high, and more than 40% of those who are unemployed have been out of work for more than 27 weeks. Likewise, the bears also argue that the jobs created since the financial crisis were mainly within low-wage paying sectors, so the consumers don’t really have much money to spend. Eventually, companies will see the effects and the S&P 500 will see its demise.

Where Will the S&P 500 Go Next?

This question is difficult to answer without conducting an extensive analysis. The arguments mentioned above are just a sample of the large number of arguments each camp has. But no matter where you stand, investors can use portfolio management techniques to protect themselves if things turn sour.

Firstly, investors should use stop-loss orders. This way, they can protect their savings from any market move against them.

Secondly, investors should focus on diversifying their portfolios, rather than keeping all their savings in one security. If the market moves against them, their portfolio swings are going to be much less damaging—due to fluctuation in one security over another.

Lastly, investors should continue to focus on long-term growth over short-term gains. The stock market may swing upward or downward on a daily basis, but over the long term, it usually follows a trend. If investors focus on the short term, then they might incur significant losses by trying to get on the “right” side of the market.

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