S&P 500 At Multi-Year Highs. Sell Or Hold?

global-marketlace-imgThe S&P 500 rose again for the seventh consecutive day on Thursday to close for the day just under 1500, the highest level since 2007 after it was discovered that U.S. jobless claims reached a 5 year low.

Some investors are beginning to question whether it is the right time to take some profits now and wait for a pullback before adding more money into the equity markets.

Billions of dollars have already been taken off the sidelines in recent weeks and added into equity markets after it became clear that the “fiscal cliff” was averted in late 2012 and the House of Representatives on Capitol Hill voted in favor of extending the debt ceiling for 3 more months, essentially “kicking the can down the road” in order to work out a longer-term strategy to negotiate future budget cuts with the White House and Democrat majority Senate.

Two big concerns in the United States, which both had the power to move markets, are now temporarily averted which allows corporate earnings results to come into clearer focus.

Still many economists agree that the last minute “fiscal cliff” resolution in 2012 is quite modest in terms of its overall scope and does not go far enough to implement serious deficit reduction meausres for reducing the $16.4 trillion debt.

As a result of the “fiscal cliff” resolution, the middle class in America won’t be faced with paying significantly more in taxes. However, the vast majority of working Americans are still left paying 2 percent more since the payroll tax cut holiday was not extended.

The wealthiest Americans are now paying higher taxes in 2013 from 35 percent to 39.6 percent.

The other can that was kicked down the road at the end of 2012, known as the Sequestration, is part of the “fiscal cliff” talk which implements across-the-board cuts, or sequester cuts, on certain federal programs and defense spending.

The sequester cuts extend until 2021 and amount to $1.2 trillion towards lowering the  U.S. deficit. The cuts will first have to be agreed upon by Democrats and Republicans on Capitol Hill, no small feat.

As of January 1st 2013, Congress was unsuccessful in reaching an agreement on spending cuts, and the sequestration was delayed until March 2013. So the sequestration is still on the horizon in the not so distant future.

Easing Measures by Central Bankers

One of the positive catalysts that helped equities rise to multi-year highs in 2013 is monetary easing from central bankers in the U.S., Japan, Britain, and to some extent the European Central Bank (ECB).

By pledging to keep interest rates low through easing measures, central bankers across the world have allowed more liquidity to flow through the market, allowing businesses, consumers, and corporations to borrow money at at lower levels.

Some economists fear that all of the easing measures undertaken by central bankers may lead to a credit bubble. But there is no proof of a credit bubble occurring in the market thus far.

China and Europe

China’s strong manufacturing sector is performing at its best level in two years as evidenced by HSBC’s Flash Purchasing Managers Index for January which came in at 51.9, up from 51.4 a month earlier.

China’s GDP showed the Chinese economy grew by 7.9 percent in the fourth quarter of 2012.

Germany’s PMI rose more than three points to 53.6, above the break-even point of 50, the level of expansion and contraction.

France’s PMI fell 1.9 points to 42.7, its lowest point since March 2009.

GDP has failed to expand in the 17-country euro area since the third quarter of 2011, a concern among investors.

 

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