AP Business Writer
NEW YORK (AP) -- Is it time to cash out of stocks?
The market has nearly tripled in a little over five years, and with each record close, the temptation grows to take your winnings and flee. If only you had done that in the crashes that began in 2000 and 2008, you might be a lot richer.
Plenty of experts think stocks are about to drop. But many others offer compelling arguments for the rally to continue for years.
The bulls point to a strengthening U.S. economy that will help companies generate big profits. They also like that companies have plenty of money to keep buying back their own stock, a big force pushing up prices.
The bears argue that, with the Standard and Poor's 500 index closing above 2,000 on Tuesday, stocks already reflect years of future profit gains. And that forecast is suspect anyway given that so many economies around the world are stumbling. They also worry that U.S. interest rates could rise fast soon, one of the surest ways to kill a rally.
The important thing to remember is that even the best investors, Warren Buffett included, find it nearly impossible to time the market to catch the lows and highs.
The bull and bear cases in detail:
A STRONGER ECONOMY
Four of the past five bull markets have ended with investors selling in a recession, or bailing out because they anticipated one. The odds of a downturn anytime soon? Not very high, at least based on the latest economic reports and forecasts.
The U.S. economy is expected to grow 1.5 percent this year, then 3.4 percent in 2015, according to Congressional Budget Office estimates released Wednesday. One reason is companies are hiring at the fastest pace in eight years.
More people working means more paychecks and money to spend. And the good news can feed on itself. People who never lost jobs but were worried about layoffs might start spending more, too. Consumer confidence has hit its highest point in nearly seven years.
All this makes it more likely that companies will keep posting higher earnings.
"This recovery will last several more years ... and earnings will grow," says Jim Paulsen, chief investment strategist at Wells Capital Management. "There is a lot of room on the upside."
Financial analysts expect earnings from companies in the S&P 500 to rise 8 percent this year, then 12 percent in 2015, according to S&P Capital IQ, a research firm. A double-digit gain would be the biggest in four years.
LOW INTEREST RATES
Interest rates are low, and that's been great for stocks. They help lower borrowing costs for consumers and businesses, which boosts profits. And they hold down interest payments on bonds, making stocks look more attractive to investors by comparison.
Many investors expect the Federal Reserve to start raising the short-term rates it controls in the middle of next year. If the Fed keeps the hikes small, the stock market might shrug it off.
That's what happened in the last round of Fed hikes, in 2004. The S&P 500 gained 9 percent that year.
Torsten Slok, chief international economist at Deutsche Bank Securities, isn't worried. He notes that the short-term rates that helped drag stocks down at the end of the last seven bull markets were all higher than 4 percent. With the Fed holding those rates near zero now, a record low, it could take many hikes -- and a bit of time -- for borrowing costs to rise enough to damage the economy and markets.
"We should expect the expansion to continue for several more years," Slok says.
One of the biggest forces in the stock rally so far is companies buying back their own shares. Companies in the S&P 500 have spent $1.9 trillion on buybacks since the bull market began in March 2009, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, a research firm.
By creating more demand for stocks, buybacks have kept prices rising even as others sell. Mutual funds, investment brokers, foreigners and pension funds have all been net sellers of stocks over most of the last five years, according to the Fed.
Companies have pulled back sharply from their near-record buying in the first quarter, but their buybacks are still pushing up prices. And companies have plenty of money to continue buying. Those in the S&P 500 have more than $1.1 trillion in cash, according to S&P Dow Jones Indices.