Cash should not be held on the sidelines. It should be invested in stocks, say two market veterans who admit this year's strong market performance caught them off guard.
“Our view this year was [it would be] a muddle-through economy, grind-higher equity market,” Nuveen Asset Management chief equity strategist Bob Doll told CNBC.
“I think a fairer assessment would have been [it's a] muddle-through economy and gallop- higher equity market,” he added.
Doll explained the markets exceeded expectations because of the “wall of liquidity,” not just from the Federal Reserve, but from central bankers around the world. On top of that, inflation stayed very quiet and fiscal policy has led to increasingly lower deficits.
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Byron Wien, vice chairman at Blackstone Advisory Partners, also started the year on an overly cautious note.
“I didn't factor in the enormous power that the monetary easing was going to have on the equity market,” Wien told CNBC
Wien says only a quarter of the liquidity from QE has gone into the real economy.
Much of the Fed's stimulus is believed to be concentrated in the stock market, which has set numerous records this year. Both the Dow and S&P 500 are up more than 20 percent so far, according to CNN Money
, and the Nasdaq is up nearly 30 percent.
Many investors are getting concerned about the sustainability of this rally. Part of their caution stems from a slew of forecasts calling for a steep correction in 2014.
Societe Generale is one firm that isn't expecting more big gains, says CNN Money. At best, the firm projects stocks will be flat over the next few quarters.
However, Societe Generale warns that when the Fed begins to taper, Treasury yields will ultimately rise and earnings growth may slow, a likely catalyst for a market correction.
Doll says people have been calling for a pullback for many months, yet the markets keep going up. It's hard to call a correction, he says.
But he outlines why the environment continues to look favorable for stocks. The Fed is supportive and there's economic acceleration, with 2014 likely better than 2013. Inflation is quiet and fiscal policy is also supportive, he explained.
It's hard for me not to want to be in stocks, Doll said.
“If I have more than a little bit [of cash] I want to put some toward dollar cost averaging over the next six months. If we have a pullback, fine.”
“Unless it's fundamentally based, I think [any correction] would be fairly quick,” he told CNBC. Doll pointed out that the market has bounced back from several corrections already, including a 7.5 percent pullback around the initial tapering talk.
Wien agrees that what investors should do at this point depends on how much cash they have.
“If you have a little bit of cash, you probably keep it and see if the correction occurs,” Wien told CNBC.
“But if you have a lot of cash, I think you probably participate in this market. You don't stay out of the market waiting for the moment of truth,” he said.
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