As last year ended, investment advisers warned clients to expect a choppier, less-satisfying 2014.
They have been right. While money managers were relieved at the stock rally late last week, many remain nervous.
When Robert Pavlik spoke with a prospective new client Friday morning, stocks were racing higher, but Mr. Pavlik's mood remained restrained.
"If I were thinking about stepping in and buying, I would be a little cautious about it," urged Mr. Pavlik, chief market strategist of money manager Banyan Partners, which oversees $4.5 billion. "Don't buy with both hands," he told the prospect, advocating a plan to invest a quarter to a third of his assets in stocks now.
And the unused money? Mr. Pavlik would simply hold it aside, in cash.
That advice reflects the widespread mood of the market now. In some ways, the economic outlook looks good for stocks. The economy is growing steadily but, as Friday's job-creation figures indicate, not so fast as to generate much inflation. That means corporate profits should rise and inflation won't force the Federal Reserve to make any sharp, unexpected shifts in what remains an easy, supportive monetary policy.
Some analysts were saying Friday that the job-creation numbers might be soft enough to make the Fed lighten up a little more, by slowing down its plans to gradually eliminate the bond buying it has been using to stimulate markets. Regardless, the weak jobs data reinforced the view that the Fed will be extra ginger in coming months and years about withdrawing support from markets.
Despite last week's gains, however, stocks are starting 2014 weakly. The Dow Jones Industrial Average remains down 4.7% on the year. Many analysts predict that the Dow will finish with a full-year 2014 gain of 10% or so, at something like 18234. If so, it would rise more than 15% from Friday's close of 15794.08.
The reason people like Mr. Pavlik aren't feeling more upbeat is that investors anticipated a lot of this good news last year, when they pushed up the S&P 500 stock index 32% including dividends.
Roughly 80% of that gain was based on expectations of good news to come, rather than on actual corporate earnings gains, according to calculations by Jason Trennert, founder of Strategas Research Partners. What that means is that corporate and economic reports need to be pretty positive now just to live up to the stock gains the market has already recorded.
Mr. Trennert said he wouldn't be surprised to see stocks fall again in coming weeks, though he thinks they would rebound later in the year. Bottom line: a lot choppier than last year. "It will be very hard to reprise what you did in 2013," he said.
Ned Davis Research Friday put out a report warning that a bear market, often defined as a drop of 20% or more in a major stock index, can't be ruled out this year. The research firm, which has been bullish for most of the stock rebound since 2009, expects stocks to keep recovering for now. Its concern is that, if investors get too excited and push stocks up too far in the coming weeks, they could pay a price later in the year. The Venice, Fla., firm introduced a set of indicators meant to signal the risk of a bear market. The indicators focus on whether stocks are rising as a broad group across many business sectors and countries, or being propelled by a narrowing group of big, high-price stocks. The latter scenario has been a recipe for trouble in the past. So far, while the indicators have deteriorated a bit, they aren't yet in bearish territory. Ned Davis isn't telling clients to pull back from stocks, at least not yet.
Mr. Trennert likes to talk about a concept he has dubbed TINA, meaning There Is No Alternative. If you don't invest in U.S. stocks, the thinking goes, where else are you going to invest? Developing-country markets have turned unstable. Europe is struggling. Cash and high-grade bonds offer the tiniest of yields. Many experts consider junk bonds overpriced. Hedge funds are struggling. The Fed is determined to get people investing again by keeping rates down and forcing them to take risks. Anyone who refuses to buy stocks, in other words, is fighting the Fed.
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That's why, despite worries about a balky U.S. economy, Washington dysfunction, a less-friendly Fed and uncertain earnings, many investors remain reluctant to get too far away from U.S. stocks. After the shaky start to 2014, they are just a little less comfortable occupying that position.
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