The recent ups and downs in the stock market may be frustrating, but one strategist said the break in the rally is also creating an attractive entry point for investors who remained on the sidelines during the first few months of the year.
"The market has been up, but a majority of investors have not participated," said Nathan Rowader, director of investments and senior market strategist at Forward Management, an investment firm in San Francisco. "Many were surprised by the strength of the market in the first part of the year, and the pullback gives them a buying opportunity – a chance to enter the market."
The latest moves downward were sparked by chatter among Federal Reserve governors as well as Fed chairman Ben Bernanke that the central bank may begin to slow its stimulus program, which currently involves purchasing $85 billion a month in mortgage-backed securities and Treasuries.
The Fed's bond buying program, known as quantitative easing, has been widely regarded as the major factor driving stocks higher.
But Rowader, interviewed at the Morningstar Investment Conference in Chicago this week, said he thinks investors took the Fed's comments about tapering QE "out of context," and their guidance isn't a departure from what has been known all along: the Fed will wait until the economy is on its own two feet before it begins to unwind its stimulative monetary policy.
"I think the Fed is just going to keep reinforcing its earlier messages," he added. "If the economy keeps improving, they'll consider changes, but not quite yet."
While the recent retreat in the market has only been modest, Rowader doesn't expect stocks will fall too much further. The economy may not be as strong as it needs to be for the Fed to begin its exit strategy, but it is slowly and gradually improving and rapid inflation is far from on the horizon—two dynamics that are enough to keep boosting the market.
As investors make their way into the stock market, Rowader also suggests they move out of their bond holdings.
"Investors have unrealistic expectations for bond investments," he said, noting that the rush into bond funds over the past several years has been because investors are hanging on to the fact that bonds have delivered a strong performance over the past three decades amid falling interest rates.
"But we're now in an environment that favors stocks over bonds," said Rowader, adding that stocks are cheap relative to the bond market and also on a historical basis.
For investors seeking steady and safe income, he recommends stocks that pay dividends, but warns against utility stocks.
While utilities are known for paying healthy dividends, their businesses are highly sensitive to interest rates, and rising rates can hinder their ability to pay out dividends.
U.S. stocks have rallied nearly 15% since the start of June, and one expert said that means the market is ripe for a pullback.
"We've just come too far, too fast," said Sean Clark, chief investment officer of Clark Capital Management Group in Philadelphia, who expects stocks to pullback between 5% and 10% during the next month, leading up to the election. "We think it's time to take some money off MOREHibah Yousuf - Oct 4, 2012 2:42 PM ET
Fresh stimulus action from the Federal Reserve drove commodity prices sharply higher Friday, but experts say don't expect the QE3-fueled boost to last long.
Crude oil prices briefly topped $100 a barrel for the first time since early May Friday morning, as investors grew encouraged after the Fed announced a third round of quantitative easing, or QE3, saying it would buy $40 billion of mortgage-backed bonds each month for however long it deemed necessary.
The Fed's open-ended bond MOREHibah Yousuf - Sep 14, 2012 2:25 PM ET
Is the Fed really that powerful? One look at CNNMoney's Fear & Greed Index says yes.
Early Friday, the index surged to 94! That's a record high for the index, with data available since 2004.
The index has been in 'extreme greed 'territory for the past week, as investors have been betting that central bankers around the world would do something to inject life into the sluggish global economy. And boy have MORECatherine Tymkiw - Sep 14, 2012 12:49 PM ET
This week's Federal Reserve meeting is front and center, with many still on the fence about whether or not the central bank will announce any new stimulus measures.
More specifically, investors have remained divided about a third round of bond buying, or quantitative easing, by the central bank.
A little more than half (52%) of the 13,000 respondents to a CNNMoney poll say they don't think the Fed will announce so-called QE3 MORECatherine Tymkiw - Sep 11, 2012 11:24 AM ET
Investors who have been burned by holding onto coal stocks this year may finally be feeling the right type of heat.
Coal stocks started heating up Friday, after China announced a $156 billion commitment for improving the country's roads, rails and other infrastructure.
With China planning 55 new major infrastructure projects, investors are betting that those projects will rev up demand for coal, which China uses to make steel for its bridges. MOREMaureen Farrell - Sep 10, 2012 1:38 PM ET
Not a member yet?Sign up now for a free account
|Greece deeply divided as vote on Europe looms|
|Why China's crazy stock market is getting scary|
|Aetna to buy rival health insurer Humana for $37 billion|
|10 most expensive colleges|
|What a Depression looks like (Greek style)|