Is it safe to buy stocks again?

By SmartMoney

For millions of Americans, watching and waiting are the new day trading -- and the trillion-dollar question is when they'll feel fully comfortable investing in stocks again.

In the U.S. alone, investors still have nearly $900 billion parked on the sidelines in cash, according to Thomson Reuters. The tide finally began to shift this spring, when a bounce in the markets and upbeat forecasts from luminaries such as Federal Reserve Chairman Ben Bernanke helped lure some investors out of hiding. Financial advisers say they're seeing a surge of inquiries from clients about stocks.

"It's about 15-to-1 in terms of calls from people who want in versus out," says Tom Hepner of Ruggie Wealth Management. And sentiment among fund managers recently shifted from "apocalyptically bearish to reluctantly bullish," according to a survey by Banc of America Securities-Merrill Lynch.

The key word, though, is "reluctantly." The recent rallies have eased some investors' fears, but it will take a lot more prodding for others to get over the crash of 2008. Although the pros know that historically stocks recover long before the rest of the economy, nobody wants to suffer more losses by getting in too early.

Or, for that matter, too late: Some who missed out on this spring's stock gains now fear that the market has no more gas in the tank. Misgivings such as these explain why pros and amateurs alike are obsessing over their favorite economic indicators -- from "TED spreads" (it's a bond thing) to taxi-line wait times -- as they try to discern if the glimmers of improvement can translate into a lasting recovery. (See "How your undies track the recession.")

With that in mind, SmartMoney polled a slew of economists, managers and strategists to find out which signals will give them confidence that the worst is truly behind us. No single one of these indicators is a surefire green light. While any number of statistics -- such as weekly unemployment claims and surveys of sentiment among manufacturers -- have helped to signal rebounds from the 10 recessions since World War II, few have hit the mark every time. Stephanie Giroux, the chief investment strategist at TD Ameritrade, says that before she utters the words "a new bull market," she needs to see "clear evidence on multiple fronts that the economy is starting to grow again."

For investors still smarting from last fall, waiting for multiple "go" signs has an appealing logic. Before they feel confident about the stock market's risks, they want to feel like the other elements of their economic lives are secure. Here are five things worth watching.

1. Stock market moves

This spring, the Standard & Poor's 500 Index ($INX) rose more than 30%, confronting investors with a familiar conundrum: Was this a sucker's rally or a long-lasting upturn?

To answer that question, some analysts looked beyond short-term price increases to study what they call the market's breadth. Jeff Rubin, the director of research for Birinyi Associates, says that when rallies are broad -- when they involve more than one sector of the economy -- they're more likely to forecast a sustainable bull market and an overall turnaround. Rubin points to rallies in 1975 and 1982 that turned out to be harbingers of the bigger recoveries that followed.

The good news is that this spring's rally was encouragingly broad. According to data from research firm Morningstar, 10 of the 12 main industry sectors saw their stocks rise during that three-month stretch, with sectors such as consumer services, industrial materials and media leading the way. The surge also stands in sharp contrast with an earlier, narrower rally from November through January, which focused mainly on financial stocks and didn't last. If Rubin's historical pattern repeats itself, investors have reason to feel optimistic.

Thinking about breadth can also help investors ride out a downturn. When a stock decline is "narrow," that's good news for stocks. This March, the major stock indexes hit 10-year lows. But as Paul Hickey, a co-founder of money-management firm Bespoke Investment, points out, only 36% of individual stocks reached new lows. That's in sharp contrast with last October, when 80% of stocks earned that ugly distinction.

The March figure was a sign that, instead of throwing the baby out with the bath water, sellers were making reasonable decisions, company by company, says Liz Ann Sonders, the chief investment strategist at Charles Schwab. And that suggests an absence of panic and a healthier climate for stocks.

Many money managers would rather base their get-back-in decisions on a more traditional measure -- whether stocks in general are cheap. To gauge this, investors often rely on the price-to-earnings ratio, which compares a company's stock price with its profits. But Charles de Lardemelle, a relatively bearish value investor and a manager of the IVA Funds, says the ratio can be deceptive because it doesn't let investors judge profit trends over time. He prefers to compare corporate profits with the U.S. gross domestic product, which measures the total output of the country's economy.

Profits currently stand at 7% of GDP. De Lardemelle expects the figure to get down to 4% before the economy and the market see the potential for a sustained turnaround.

What to watch: stock prices across different sectors of the economy.

Where to get them: Morningstar.

Continued: Borrowing and lending

 1 | 2 | 3 | next >