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Now that the major indices have rallied for the past two months, plenty of market forecasters are saying that stocks are overdue for a correction. While stocks have made a nice move, a rally of this duration and amplitude is certainly not unprecedented. Plenty of investors and market analysts are gun shy because advances of any significance have been infrequent over the past couple of years.

We can find a similar example as recently as 2004. After struggling the first half of the year, the Nasdaq bottomed in August and rallied strongly through the end of the year. We could very easily see a repeat of that situation this year. The chart below should help you compare the two periods. In both situations, the advance followed a fairly significant corrective period. Fundamentally, there are significant differences. Most fundamental factors are much stronger today than they were at the end of 2004. The point is that it certainly is possible for stocks to continue to advance through the end of the year without a significant correction or consolidation.

If you can remember back to 2003, stocks advanced from mid-March through the end of the year without a significant correction. The Dow and the S&P 500 both ended the year with better than a 25% gain. The Nasdaq finished the year up 49%. Those kinds of years and returns are unusual, but economic, cyclical and technical situations are currently aligned in favor of a sustained advance. I’ve detailed many of these factors in previous weeks so I won’t repeat them now. Suffice it to say, there is reason for investment optimism.

I need to address one other topic. In recent days we’ve had a few clients question why we currently hold some positions in real estate funds. After all, for months the popular media has indicated that real estate is overvalued and even warned that a real estate crash is imminent. While a real estate downturn could be just around the corner, the fact is that real estate remains one of the strongest market sectors. It is also less volatile than many sectors.

The chart below shows iShares Cohen & Steers Real Estate ETF (ICF). The gold line is the Nasdaq for comparison. Notice that over the past three years, this fund advanced at an annualized rate of nearly 30%. There have been four significant corrections during that time, each lasting three to four months. Overall, the fund (and the sector) remains in a long-term upward trend. You can see that the fund has advanced strongly just in the past four months.

There is no question that there are some areas of the country where speculation has pushed real estate prices to unsustainable levels. In those areas, property values are likely to decrease. But there are also other areas where there has been no decline in real estate prices. Home sales and home building remain strong. By historical standards, mortgage interest rates remain at reasonably low levels. As long as the sector and real estate funds trend upward and remain among the market leaders, there is no reason to avoid holding a position.

F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group. This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call Mark Sumsion or Scott Garbutt at 800-279-3377.

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