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Investors to test waters of stock market in 2011

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Travel back to March 2009 and there was ample evidence that the end of the world -- financially -- was at hand. Each and every day seemed to bring more bad news in the job market, failing businesses and political chaos.

Flash forward less than two years and the mood, to put it mildly, has changed completely -- a factor that has not been lost on the stock market.

Back at the bottom -- March 9, 2009 -- the bellwether Dow Jones industrial average had dropped to 6,547. Hindsight tells us that was a great buying opportunity for investors, as the Dow is ending 2010 up 75 percent from its darkest days.

However, as so often happens, most investors have avoided participating in the recent rally and are only now starting to allocate investable dollars toward the stock market.

“2010 was a good year for the stock market, and I expect 2011 to be an even better year. It’s going to be an asset class that comes back into favor,” said David Bianco, chief U.S. equity strategist at Bank of America Merrill Lynch in a recent briefing on the economy and investments.

He suggests the S&P 500 stock index could climb to 1,400 from its current level of near 1,240.

While the opinion on Wall Street is one thing, the mood on Main Street is quite another. Many individual investors watched their portfolios -- often in the form of retirement accounts -- crumble after the markets peaked in October 2007. Prices fell by more than 50 percent and caused some to swear off the dangers of investing.

But there’s nothing like a rally to bring them back.

“Our clients are increasingly recognizing there are some good opportunities to more actively engage the market, in particular by investing in equities. But we can see the ups and downs of the economy have shaken people’s confidence in their investment decision making,” said Troy Stevenson at Charles Schwab (NYSE: SCHW).

As a result, investors are seeking out investments that offer the potential for growth but provide some sense of principal protection. Kelly Wright, managing editor for “Investment Quality Trends,” a newsletter published in Carlsbad, said that will cause investors to turn to a classic -- dividends.

Wright said the recent action by Congress and the Obama administration to extend the 2001 tax cuts will be viewed positively.

“Because the top tax rate on dividends will stay at 15 percent, according to Standard & Poor’s, the two-year extension will put another $75 billion into investor’s accounts, which are typically re-invested. I think we may also see a shift toward even more dividend increase announcements by company boards that may have been hesitant to announce a dividend hike in recent months,” said Wright.

S&P estimates the reduced tax on dividends over the past 10 years has benefited investors by $348.4 billion in taxable accounts.

Like most professional market observers, Wright has many concerns about both the near-term and long-term prospects for the stock market based on uncertainty about the U.S. and global economies.

A 2011 forecast report from LPL Financial Research points out that while the stock market has been advancing, individual investors have been net sellers of stock mutual funds in favor of the perceived safety of bond funds.

“While individual investors may have overcome, to some degree, their distrust of the sustainability of the economic recovery and policymakers in Washington, they remain skeptical of the integrity of the U.S. stock market. More than $80 billion has come out of domestic equity mutual funds since the ‘flash crash’ of May 6, 2010,” according to the LPL Financial report.

Another local money manager, Ken Stern of Rancho Bernardo-based Ken Stern and Associates, suggested that stock selection is critical.

“Look for strong earnings and sales. Don’t overpay for growth, but don’t scrape the bottom either, as cheap tends to stay cheap,” said Stern.

A tremendous number of variables are likely to have an impact on the entire range of investments. For instance, bonds have become one of the investments of choice in 2010 as the Federal Reserve cut interest rates to stimulate the economy. And, as rates declined, bond prices rose, creating what some call a bubble.

“While 2011 is neither the year of a bubble nor a burst for bonds, investors should prepare for modest total returns. Now, the lower level of yields implies even lower returns going forward,” cites the LPL report.

Other assets such as gold and oil will be affected by economic conditions in 2011 such as inflation and government spending.

Bottom line, just as investors were able to anticipate the fits and starts that moved the markets in 2010, so will they be at the mercy of unexpected circumstances in the new year.

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