BOSTON (AP) — Has the stock market finally entered a comfort zone?
Consider that the Standard & Poor's 500 index on Friday closed above 1,500 points for the first time since December 2007. Fourth-quarter earnings are mostly coming in strong. Less than four weeks into the year, stocks already are up 5 percent.
Anxiety has eased so much that the Chicago Board of Options Exchange Volatility Index, also known as the VIX, has dropped to its lowest level in nearly six years. Referred to as the market's fear gauge, it reflects expected movement in the S&P 500 over the next 30 days, as measured by options prices.
What's more, investors are finally returning to the market. U.S. stock mutual funds attracted nearly $13 billion in net deposits during the first two weeks of the year. That's an about-face from 2012, when withdrawals exceeded deposits for 24 weeks in a row, ending in late December.
A key reason that investors are back is the Jan. 1 deal between Congress and the White House to avert the so-called "fiscal cliff." Thorny issues remain unresolved, including spending cuts and potential reforms to entitlement programs like Social Security and Medicare. But there's no longer an immediate threat of fiscal disaster.
When stocks are rallying as they are now, investors should exercise caution. The market is up more than 120 percent since early 2009, and the strongest returns may be behind us.
Yet Bruce Herring of Fidelity Investments is confident that the long-term outlook remains bright. As a chief investment officer with Boston-based Fidelity, Herring helps oversee more than $500 billion in stock assets.
Herring explained his belief that stocks offer strong growth potential because investors face far fewer economic and political uncertainties than they did a few years ago. Below are excerpts from an interview, edited for clarity:
Q: What's the key reason that you're optimistic?
A: We're starting to achieve a level of clarity we haven't had in a long time, and that's really powerful for stocks. For starters, there's less uncertainty in Washington. In President Obama's first term, there were many crises and several industries came under increasing scrutiny and regulation. With so much uncertainty, companies behaved conservatively. They stopped hiring, cut capital spending plans and they didn't raise dividends.
With the election behind, we know we'll continue to have Democrats and Republicans each controlling one chamber of Congress, and a president entering his second term. We'll still have partisanship. But we're starting to get clarity around policies on financial services, energy and other areas. And we've got clarity about tax policy. We haven't had that in years.
Q: What makes you optimistic about the economy?
A: We're seeing a recovery in the housing market, and that matters to everybody, from corporate CEOs to consumers. A rising housing market is a powerful backdrop to general economic activity and the stock market broadly. Confidence matters a ton. Stocks are rallying this year because the market is operating on a longer time horizon, now that there's more clarity.
Q: But unemployment remains high, and there are other troubling signs in the economy.
A: Yes, but it's better when you look at what drives the stock market, and that's corporate earnings. Stocks continue to be priced inexpensively relative to the earnings they generate and we're seeing decent earnings growth. And America's competitiveness is very strong. Natural gas is incredibly cheap, and we've got an efficient and strong labor force. We've had lots of productivity improvements in corporate America and modest wage growth.