Follow The Cash


The Dow Industrials are within 1.5% of the all-time high of 14,164.53, while the S&P 500 is within 3% of its all-time high of 1,565.15. Those points do not have any significance under the Dow Theory, but all-time highs in these widely followed benchmarks would likely ratchet up the pressure on portfolio managers still holding a lot of cash.

New all-time highs could also help convince some skeptics that the trend is truly bullish, especially among those who argue that stocks remain stuck in a secular bear market that began in 2000. Sentiment is already fairly bullish among individuals and investment newsletters, and that is one reason a 5% to 10% pullback in the averages would not be surprising.

However, Wall Street strategists remain skeptical, with Bank of America Merrill Lynch's "sell-side" indicator showing an average recommended stock exposure of 49.8%. Although up from an all-time low of 43.9% in January, the indicator is well below the 15-year average of 60.6%, according to The Wall Street Journal. Over the last 30 years, a relatively low reading on the sell-side indicator has been a positive for year-ahead stock returns, partly because a low reading leaves room on the upside if strategists chase a market rally.

Another, more important constituency — chief executives and chief financial officers of U.S. companies — is less likely to be swayed by a rally to all-time highs. But share prices are widely viewed as a leading indicator, and continued stock-market strength could encourage companies to put more cash to work.

A recent Wall Street Journal poll of 50 companies in the S&P 500 found they plan to increase capital spending just 2% this year — a sharp slowdown from the growth seen in 2011 and 2012. S&P 500 companies paid out a record $281.5 billion in dividends in 2012, up 17% from 2011 and above the all-time high set in 2008. But companies are still paying out a relatively low percentage of earnings in dividends, so investors will be disappointed if the pace of dividend growth slows sharply.

Even more bullish would be a rebound in takeover activity. With corporate cash levels up sharply since 2008, debt levels relatively modest, and interest rates very low, the stage is set. What's missing is confidence on the part of potential acquirers.


While a near-term pullback would not be surprising, we expect stocks to move higher in 2013. Investors should maintain a constructive, opportunistic posture toward stocks, looking for attractively valued growers. Our Focus List and Buy List have 97.5% in stocks, versus 91.9% for our Long-Term Buy List. Top picks include this week's additions to the Focus List — J.P. Morgan Chase ($49; JPM) and Qualcomm ($66; QCOM).

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