Your Money: Financial crisis officially over, proceed into stocks with caution

The Dow Jones index rose above 14,000 Friday, for the first time since October 2007. By itself, the number might not mean much. But portfolio managers and investment strategists believe it does signal one thing: The financial crisis is officially over.

The Dow Jones Industrial Average gained 149.21 points to end last week at 14,009.79 - the highest since that rosy period just before the markets slumped and the Great Recession began. The Standard & Poor's 500 Index last Friday also jumped 1 percent to return near to a five-year high.

The markets tumbled Monday, possibly because the Dow at 14,000 is an emotional barrier for investors at this point.

How should retail investors be positioning themselves to take advantage of a climate that has been sending the markets higher? James Paulsen, chief investment strategist at Wells Capital Management, rattles off key factors:

U.S. household net worth has been almost entirely restored. Our household debt service has fallen back to levels close to 1994. The U.S. unemployment rate is declining, while the labor force grows. Banks are no longer near collapse, and weekly bank loans have been trending steadily higher. Foreclosures have slowed markedly; housing activity and home prices are finally rising. Consumer confidence is near a five-year high. A massive municipal debt failure no longer appears imminent. Corporate profits are at an all-time high.

"So where's the crisis?" asks Paulsen. "Despite being in the fourth year of a subpar recovery, the Federal Reserve continues to employ policies never before used and which normally would be reserved only for times of national economic emergencies."

That could mean the Fed's accommodative stance on interest rates may stimulate the economy so much that inflation will hit. One sign that might be happening is a big increase in commodity prices.

Commodities last Friday capped the longest run of weekly gains in 17 years, on mounting speculation that the economies in the United States and China will rebound, boosting demand for metals, energy, and crops.

This rising inflation benefits investors in the following sectors: basic industrials, energy commodities such as oil and gas, and precious metals and mining. Long-term, however, those rising prices could eventually crimp corporate profit margins.

Money manager Kyle Bass cited the Federal Reserve's escalating money-printing as driving the markets. He would not be surprised to see stock prices move higher still, according to an interview he gave CNBC.

So the Dow at 14,000 is just a number to Bass, not a barrier necessarily.

The Fed has been trying to inject enough liquidity into the financial system to keep bond rates low, and push investors toward riskier assets such as stocks - and so far, it has worked. There has been, however, a large divergence of performance within the stock market's different groups - favoring consumer- and interest-rate sensitive sectors.

Given the overall economic and inflation outlook, this means investors should maintain a favorable bias toward groups that benefit from rising government spending and higher commodity prices, such as oil and gas concerns.

A good case can be made that the Fed will offer continued liquidity injections, adds Wells Capital's Paulsen. After all, real GDP growth is still quite slow and the unemployment rate is still too high to consider monetary tightening, he contends.

Josh Brown, who founded the blog TheReformedBroker.com, believes the "Great Rotation" out of bonds and back into stocks is still alive.

"Yes, there is curiosity about stocks once again, there is interest," Brown said. "But there is also dubiousness, apprehension, suspicion, and leeriness."

Kevin Bannon, chief investment officer at Highmount Capital, which has offices in the United States and Europe, explains that value and price are not the same thing. Investors shouldn't confuse a Dow 14,000 level with stocks being extremely expensive.

"Fundamentals such as economic growth, inflation, interest rates, and corporate profits determine value in financial markets. Psychology and emotion set price," he wrote in a note to clients.

So where are we, as the Dow flirts with a new high?

We're back to where we were five years ago. The financial crisis is over. There still is value to be squeezed from equities. Proceed back into stocks - but with caution.