Expect Market Correction, Says Pro

The market had a strong first half of the year, but don’t expect the rest of 2013 to be as “spectacular,” Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors, told “Nightly Business Report.”

The market hit record highs in the first half of 2013, with the S&P 500 gaining more than 12 percent, its best showing in 15 years.

That’s left the market “2 percent to 4 percent overvalued,” Johnson said. He expects a “good but not great and maybe even modest correction as we move through the third quarter.”

So what should investors do?

Johnson urged patience.

“Drag your feet,” he said. “Buy a little now and wait for that so-called correction that I think will be coming and then buy some more.”

(Watch: Pieces in Place’ for ‘Sustained Recovery,’ Says Economist)

While he thinks stocks are still the place to be, Johnson believes we have likely entered a bear market in bonds. He suggests having at least 57.5 percent to 60 percent of your portfolio in stocks and the balance in bonds.

“The stock part of the portfolio is going to perform the best between now and the end of the year, and particularly between now and the end of 2014,” he noted.

“Look for the returns from the stock market to be roughly the 6 percent level through 2014 and maybe minus 1.5 percent in the bond market as a guess.”

If you are looking to add stocks to your portfolio, go with names that are working, he said, like Coach and Disney.

He also likes the financial sector, which “has been on fire,” because he thinks its margins are going to expand. First Republic and Fifth Third are two names on his list.

Lastly, Johnson said the health-care sector has been doing “extraordinarily well.” The price-earnings ratio is low and it has good dividend yields. Johnson likes Merck and Pfizer in that space.

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  1. Greg Solomon says:

    The Dow Jones Industrials and the S&P 500 Index finished the first half of 2013 with its strongest performance since 1998. In May, the Dow eclipsed its previous all-time record high before the news that sometime in the not so distant future our Federal Reserve may end its massive monetary stimulus program. That caused an acute reaction in both the stock and bond markets. Interest rates reversed course to spike higher, bonds were priced lower and the stock market rally hit a brick wall.

    Properly managed investment accounts would not have a portfolio that is fully invested in stocks alone….certainly not after the events that occurred in 2008 and 2009. The other portion of a balanced portfolio generally includes some mix of bonds, bond mutual funds and international holdings. The first half of 2013 was not as generous to these investment sectors. According to the Wall Street Journal, most fixed income investments are sitting at levels that are slightly below their January levels.

    So, while interest rates remain at historically low levels – the rates on 10 and 30 year Treasury bonds are about 2.5% and 3.5% respectively. The days of ultra-low yields appear to be ending. Meanwhile, the impact of slightly higher interest rates is a two sided coin. On one side, the low interest-rate environment has been one of the ingredients for a strong stock market and on the other hand higher rates will greatly benefit income seeking investors.

    During each year the stock market has its ups and downs. However, many analysts feel that for the long-term stock investor, modestly higher interest rates can still benefit stock the slightly Federal Reserve’s stimulus program. At the same time, income oriented investors can finally look toward capturing higher interest income payments.

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