Blue Skies Returning for Stocks!

The Fed's Open Market Committee decided to leave interest rates unchanged at its meeting yesterday, citing a continuing moderation in economic activity brought about by the slowdown in housing. Not surprisingly, the stock market took the news positively, and that pushed the Dow to within one percent of its all-time record closing high.

I'll go on the record (as I have been lately) to say that you should expect that high-water mark to be retaken, along with the all-time, intra-day high water mark of 11,950. The reason: in the long run, two things determine the direction of stock prices — interest rates and earnings — and both are once again aligned favorably for stocks. And even though the Dow's march toward the historic highs has been excruciatingly slow and halting at times, that too can be considered bullish because it has kept investor sentiment in check (an overly bullish sentiment environment would be a bearish sign).

Furthermore, as we look out on the horizon, the markets are forecasting even better things to come. Fed Fund futures traded on the Chicago Board of Trade are already pricing in a 25 to 50 basis point (quarter to a half percent) easing by the Fed sometime by the middle of next year. Moreover, recent data on inflation and the big sell off in oil and gasoline prices might make that happen sooner.

Personally, I don't think this bull market will be ready for any sort of a meaningful pause until household ownership of stocks exceeds the high water mark achieved in 1999 (a year when individual holdings of equities hit $17 trillion). By comparison, households owned only $14 trillion in corporate equities at the end of last year, and the data for the first half of this year shows that some of those holdings were reduced.

While difficult times might still lie ahead for real estate investors, the stock market looks just the opposite. Not since the dark summer of 2002 has there been such a great time to get into the market. Investors who got in back then were well rewarded, however, those who waited to see “the proof” of an economic recovery, ended up buying in the second quarter of 2004 — and they made nothing.

With favorable conditions returning for equities, now's the time to jump in with both feet. If you don't have the time or the knowledge to pick stocks, consider investing in a small-cap or mid-cap value fund, preferably an ETF (Exchange Traded Fund), such as Vanguard Small-Cap Value (VBR) or Vanguard Mid-Cap Value (VOE). Over the long haul, small-cap value has outperformed every other type of investment. Buy them, stay patient and disciplined, and hang on for the ride.

Oh, one more thing: keep perusing these columns or looking for me on “The Cost of Freedom,” because when the crowd eventually becomes super-bullish on stocks (which they will), I'll be telling you when to take some of your winnings off the table — and where you should be putting it next!

Have fun!

Mike Norman is the Founder and Publisher of the Economic Contrarian Update and a FOX News business contributor. He is also a radio show host at BizRadio Network.