The rally that has driven stocks to record highs paused this week as investors tried to figure out where things are headed next.
Stocks were mixed on Friday and posted their second weekly loss in a row. Indexes reached record highs as recently as Monday, but then declined.
How come? Investors may be nervous that stocks are overpriced, that stock prices have grown faster than justified by profits. They may be worried about conflict with Iran, or the debate over federal spending. Some are worried the Federal Reserve will decide next week to reduce its economic stimulus, which has boosted stock prices.
“It’s a hiatus,” said Frank Fantozzi, CEO of money management firm Planned Financial Services. “I really think there’s nothing economically wrong.”
Fantozzi noted that other bull markets have run for seven or eight years and peaked with higher prices compared to profits than what we’re seeing now.
The Dow Jones industrial average rose 15.93 points, or 0.1 percent, to close at 15,755.36. The Standard & Poor’s 500 index fell 0.18 points, or 0.01 percent, to 1,775.32. The Nasdaq composite rose 2.57 points, or 0.06 percent, to 4,000.98.
All three indexes fell for the week despite strong reports on employment, housing, and retail spending. Investors have been worried that the stronger the Fed thinks the economy is, the more likely it is to stop buying $85 billion per month in bonds. The purchases have been aimed at keeping interest rates low, which makes it cheaper to borrow.
That has sent investors into stocks as they seek higher returns. The big indexes are up 20 percent or more this year.
The central bank’s policymaking committee meets next week and will announce any decisions on Wednesday.
Guessing when the stimulus will end has become a parlor game for investors. They are stuck between betting that it will end soon, meaning stocks could decline, versus betting that it will continue, bringing the bull market along with it.
Scott L. Wren, a senior equity strategist at Wells Fargo Advisors, believes the Fed will telegraph its intentions well in advance. Since they haven’t done that yet, it suggests they won’t act until the spring, he said. He also thinks the Fed could reduce its stimulus very slowly, easing the pain for financial markets.