With all three major stock indexes flirting with new all-time highs, investors seem to be joining the rally with abandon. Despite the very real issues of sequestration, continued easy money policy from the Federal Reserve, and a weak employment picture, there are some positives that suggest the stock market’s rally may have legs. Still, prudent investors look at the whole picture and use caution in their approach to trading, meaning that an allocation to precious metals is wise. While both gold, as represented by the SPDR Gold Trust (ETF) (NYSEARCA:GLD), and silver, as represented by the iShares Silver Trust (ETF) (NYSEARCA:SLV), have been on a multiyear rally, the industrial applications of silver make it a better play at current levels.
The stock market’s historic run
Over the past few weeks, the Dow Jones Industrial Average has hit a series of new historic highs, and the S&P 500 is zeroing in on its own all-time high. Highs like this tend to entice investors into stocks as fears of missing the rally intensify. This type of rotation is often a strong contrarian indicator, but the news isn’t all bad. As things stand, the S&P’s current P/E ratio is more than 5% below the index’s historical average of 14.8, based on data going back to 1968 from Thomas Reuters. In addition, with U.S. Treasuries yielding less than 2%, the average dividend yield for companies in the index was 2.19% as of last quarter; even with the run-up, stocks are offering more yield than government securities are.
In terms of the overall economy, U.S. manufacturing was unexpectedly strong in February as retail sales figures had a good showing. Factory output, which had fallen 0.3% in January, doubled expectations by increasing 0.8%. Last week’s job’s report also showed a marked improvement in the employment situation, but with the economy adding 236,000 jobs, the figure was still below the sustained 250,000 that economists believe are necessary for a recovery.
While these figures make the stock market look appealing, it’s important to put them into the proper context. Bickering in Washington continues to intensify as the effects of sequestration are beginning to be felt. Some of the sillier debates have focused on the cancellation of White House tours and President Obama’s golf outings, while 700,000 jobs remain in harm’s way.