Even if all goes according to the bullish scenario, however, investors will soon realize that investing in a bull market approaching senior-citizen status is different than what they've grown used to. Until recently, for instance, a winning strategy for investors was simply to buy and stick with winning stocks. But a momentum-based approach is no longer working. For evidence, look no further than the recent fall of high-flying biotech and social media issues. The Nasdaq Biotechnology index has fallen 16 percent from its February 25 peak, and shares of social media standouts Twitter (TWTR) and LinkedIn (LNKD) plunged 48 percent and 40 percent, respectively, from their recent peaks.
The good news is that the market's most overpriced sectors are retreating without bringing the broader market down with them. "Bubble talk was applied broadly to the market, but really applied to only those high-flying areas," says Liz Ann Sonders, chief investment strategist at Charles Schwab.
Stocks overall are still fairly valued, if no longer cheap. Based on estimated year-ahead profits, the S&P 500's price-earnings ratio is 15 -- a tad below the long-term average and well below the levels of past market peaks. If the market's hot spots can cool down on their own, "it's possible we can wring out the excesses without a major calamity," says Sonders.
The perils of politics
That's unless Washington roils the markets again. Midterm election years bring political uncertainty and stock market volatility. In every midterm election year since 1962, says Sonders, the market has corrected, sometimes viciously, with average declines of 19 percent. But patient investors are rewarded, because 100 percent of the time, the market has rallied -- and significantly, with average gains of 32 percent for the 12 months following the correction.
Geopolitical upsets -- especially in reaction to Russia's activity in Ukraine -- are another worry. "There may not be a fighting war, but an economic war could have an effect on the global economy," says David Kelly, of J.P. Morgan Funds.
- Also on Kiplinger: International outlook: Struggling economies, bargain stocks
Whether or not a major pullback occurs, investors should expect continued shifts in winning styles and sectors. For example, the long winning streak of small-company stocks is likely coming to an end. From the market bottom in March 2009 until March 4 of this year, cumulative price gains for the small fry far outpaced their blue-chip brethren: 228 percent for the Russell 2000, a small-company index, compared with 178 percent for the S&P 500, more of a large-company barometer. But since its recent peak, the Russell 2000 has retreated 6 percent, while the S&P has been essentially flat.
Historically, small-company stocks have led the market in periods of slower economic growth, but they fall behind when GDP grows by 3 percent or more, says Russell Investments, the keeper of the index. Moreover, small-company stocks recently traded at an average P/E that is nearly 110 percent of the 20-year average, while the P/E of large-company stocks was 6 percent below their 20-year average.
Similarly, when economic growth lags, investors bid up the stocks of companies -- of whatever size -- that have rapidly growing earnings. So-called growth stocks have generally led the market since early 2007, an unusually long cycle of dominance. But with confidence in the economy improving, it makes sense to gravitate toward stocks selling at bargain levels relative to earnings and other traditional gauges of value.
That means choosing shares of Caterpillar (CAT) over Tesla Motors (TSLA), International Business Machines (IBM) over Netflix (NFLX), and Merck (MRK) over Regeneron Pharmaceuticals (REGN). So far this year, iShares Russell 1000 Value (IWD), an ETF that focuses on large, undervalued companies, has gained 3.9 percent, while iShares Russell 1000 Growth ETF (IWF) has gained 1.1 percent.
"Rotation is the lifeline of a bull market," says veteran market analyst Ralph Acampora, of Altaira, a money-management firm based in Switzerland. "As long as the money goes somewhere else, but stays in the market, that's fine."
As you tweak your own portfolio, consider building some cash reserves. In a shifting market it doesn't hurt to take some of the money you've made off the table to be able to pounce on new opportunities or if changes in your circumstances so dictate.
Sam Stewart, chairman of Wasatch Funds, has accumulated a little more cash than he normally holds in the funds that he manages as he prunes stocks he now considers overpriced from his portfolios. "Choppiness is a reasonable forecast for the year," Stewart says. "I want to make sure we have some dry powder on hand in case the market does correct and we see companies we want to buy at attractive prices." He says he will be looking for bargains among technology, health care and financial firms -- particularly those that are lifting their dividends.
Stewart currently recommends shares in CVS Caremark (CVS) because he believes the corner drugstore is becoming more central to family health care. Stewart also likes Wells Fargo (WFC), trading at a reasonable 12 times estimated year-ahead earnings and yielding 2.8 percent. The bank navigated the financial crisis "just fine," he says.
Let's just hope that investors will be able to say the same thing about navigating the stock market this year.
More from Kiplinger
VIDEO ON MSN MONEY
Give 300 million to Congo, not to any of our financially distressed USA ! cities , can you believe what goes on in Washington
"TOKYO, June 10- An all-time low for euro zone money market rates bolstered the region's bond rally and held down the euro on Tuesday, providing clear evidence that 's latest support measures are gaining traction. The steady drip-feed of global stimulus also kept world shares inching towards an all-time high as another record close for Wall Street and a three-year high for Asia left them heading for a fifth day of back-to-back gains."
Notably, Japan has been pumping TRILLIONS into Europe for years now. When we see articles penned in Asia we should fully discount them as bunk. Europe has nothing going for it at all. When we see industry come to it, we will see the seed, when it's manufactured products give it viability, then we can call the region- poised for recovery. IF MONEY PRINTING DOESN'T STOP IT WILL DESTROY THE GLOBE. WE DON'T NEED WEALTH, WE NEED ECONOMY. DESTROY THE CENTRAL BANKS, RECOVER THE WORK ETHIC.
That's what they said at the end of 2012 and it's risen nearly 40% more since.
NO ONE can predict short-term market directions. The subtitle, "As we near the halfway mark of 2014, the bull market isn't over..." is as childish as saying "I know the Seahawks are going to repeat as Super Bowl Champs." There are simply too many variables: political tensions, tsunamis, droughts, etc. that are unpredictable to know what's going to be on market movers minds short term.
Where to put you money now is the same place as half a year ago - everything else being equal in terms of your needs.
The S&P 500 avg. P/E was 20.3 at the end of 2013 and is 19.5 now. 2014 is on pace to add the most net jobs of any year in the 2000's and experts are estimating 3% to 4% GDP growth is things proceed as they seem. Bond rates have dropped and may be kept down for years as Europe, Japan, etc. havee cut bond rates drastically and foreign money is pouring into U.S. bonds. The real estate market is somewhat stagnant.
This means people are likely to keep money in stocks and sector leading companies with dividend stocks should continue to do well.
Wow, funny how article after article can refuse to talk about Global Debt rising 40% since the Great Recession. The debt levels of back then set off the Great Recession. Now that we are far worse off, yet these Fools behave as if everything is Fine and Dandy. These folks are just glorified used Car Salesmen trying to sell anything and Everything. This is a Old Bull Market, not the Bright and Perky one of Years ago. You know what happens when you try to push to the LIMITS, something that's really OLD. Exactly.
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[BRIEFING.COM] In case anyone needed a reminder how beholden the stock market has gotten to the Fed keeping rates at the zero bound, they were offered one today when the major indices pretty much turned on a dime following a report out of The Wall Street Journal's Fed watcher, Jon Hilsenrath, that suggested the Fed may very well keep the "considerable period" language in tomorrow's directive.
Following the Fed is an exasperating study of semantics, yet no one but the Fed is to ... More
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