The Federal Reserve has become the stock market's best friend.
With policymakers stimulating the economy and driving down long-term interest rates, consumers and businesses have been induced to borrow and spend. That has helped two of the three major stock indexes hit all-time highs.
But eventually there will come a point when the easy money will tap out. And that has local investor Norm Caris hedging his bets.
"The markets are hitting new highs due to the unprecedented flood of liquidity being poured into the system by the Fed," said Caris, a Kauai resident and managing director of Los Angeles-based investment bank B. Riley & Co. "This money-printing experiment is not only driving stocks higher, but portends a brighter future for another recent investment for us: gold. We believe that the ultimate outcome of this level of federal stimulus will be inflation, and to hedge that we think investors should hold a portion of their portfolio in gold."
Caris, one of four participants in the Star-Advertiser's 12th annual investment contest, was in second place at midyear after his hypothetical $20,000 portfolio rose 24.7 percent to $24,930.96.
Dwight Melton, co-founder of the Hawaii Stocks and Options Group and a four-time contest champion, was in first with a 42.8 percent return to $28,561.14.
Barry Hyman, vice president, private client group, for the Maui branch of FIM Group Ltd., was third with a 13.6 percent increase to $22,725.71.
And Richard Dole, chief executive of Hono lulu-based investment bank Dole Capital LLC, was up 3.4 percent to $20,683.85.
For the quarter, all three major indexes eked out small gains. The Standard & Poor's 500 index had a total return of 4.5 percent while both the Dow Jones industrial average and the Nasdaq composite index were up 2.9 percent. At midyear the Dow was up 15.2 percent, the S&P was ahead 13.8 percent and the Nasdaq was up 13.4 percent.
Melton said investors are simply taking advantage of the only game in town.
"The Dow and S&P 500 are continuing to hit records because money follows returns," Melton said. "Stocks are not undervalued from most perspectives, but with low inflation, still unattractive fixed-income rates, and questions on the staying power of real estate in a period of rising mortgage rates, stocks seem to hold some selective attraction over the past six months."
Melton, who has been picking sector indexes that triple the performance of the industry or the stocks that they track, turned in the best performance in the second quarter of any of the four experts with a 7.9 percent increase in his portfolio. His best performer was Direxion Retail Bull 3X, a retail index fund, which jumped 19.6 percent during the April-June period. For the third quarter he mixed up his portfolio by purchasing indexes that track semiconductor stocks, the Russell 2000 index of small stocks and an index that tracks financial stocks. He sold indexes that follow health care, real estate and the Dow.
"The market pace should pick up over the next six months," he said. "Increasing consumer confidence, better housing data and the brighter employment outlook underscore this optimism. Also, the Fed seems unlikely to raise short-term interest rates until 2015."
Caris is not as optimistic and said caution is warranted.
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