Should I Be Worried that the Stock Market Is So High?

MichaelDividends, Education, Investment, Misc, Saving Money22 Comments

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bull market

The bull market is still running, but some experts say the end is in sight.

At the same time, many investors see the stock market’s record breaking streak as the sign of a resurgent American economy, including President Donald Trump. To many partisans, Wall Street’s performance is a strong endorsement for the fledgling administration’s promised tax cuts and reduced regulations.

New Highs in the DOW

It is true that the stock market has been experiencing a historic rise in recent months. In January, the Dow Jones Industrial Average crested 20,000 for the first time in its history. Just recently, it shattered its record again by climbing to 22,000 points. But not all economists are as optimistic as the White House.

“It’s a nice problem to have, but it’s still a problem,” Jeff Sommer, a finance and economy columnist for The New York Times, wrote in a piece published back in March.

Proceed with Caution?

In fact, some economists are sounding the alarm, advising investors to proceed with caution for the foreseeable future.

“Investors may be well served by locking in some profits in U.S. stocks,” reads a recent note from Bank of America Merrill Lynch strategists, according to CNBC.

Wall Street skeptics have two key concerns. First, the Federal reserve has been slowly increasing interest rates and has recently announced that they will begin the complicated process of shrinking their $4.5 trillion in bond holdings.

The fear is that the combination of the higher interest rates and the shrinking of the bond holdings might have a stunting effect on the economy, or worse, collapse the market. In short, the foundation of our current bull market might not be strong enough to survive even the slightest shifting of the ground underneath.

Another concern is the way that the markets have responded to earning reports. Traditionally, companies that have beaten their earning expectations for two-quarters in a row experience a bump in their share prices. On the whole, that has not been the case recently. This is the first time such a phenomenon has occurred since 2000, which just happened to be the time the tech bubble burst. Many economists see this echo as a warning sign, as an omen of bad things to come.

Because while the stock market is reaching staggering new highs (the S&P has advanced 10% so far this year), those gains aren’t filtering down to other parts of the economy yet. Wages remain stubbornly flat, and the stock market is not the only part of the economy breaking records. This year, the New York Federal Reserve reported that 44.2 million Americans hold a combined $1.44 trillion in student loans. Despite these warning signs, few economists have come out and expressly predicted a stock market downturn, and CNBC reports that even those Bank of America Merrill Lynch strategists currently have “a 56 percent allocation to stocks.”

How Should Markets React?

 

In New York Times column, Sommer argues that the bull market, which has been running since March 2009, has been a remarkable market event. In fact, it’s so remarkable that it is confusing many notable economists.

For a variety of reasons, the stock market is not behaving the way markets normally do after a financial crash like the 2008 Great Recession. Take the latest jobs report: while unemployment has reached a 16 year low, wage increases are significantly below where economists would expect at this point in a recovery.

Another important factor is some fundamental changes in the way that investment is carried out in the United States. Fortune writer Alan Murray explains:

By the way, here’s one more reason to be encouraged. Late cycle stock-market surges are usually driven by “dumb money” — i.e. small investors — pouring funds into the market at just the wrong time. But Jason Zweig reports small investors have pulled $17 billion out of U.S. stock mutual funds and exchange traded funds in the past month. That’s partly because so many American now own retirement funds that keep stock investments at a set percentage of total investments. So when stock prices rise, the funds sell stocks to “rebalance.” Zweig argues that makes the market less susceptible to bubbles than it was, say, in 1999.

How such fundamental shifts will play out are impossible to know, which is why there is so much uncertainty surrounding the future of the stock market.

What does that mean for investors? That depends entirely on your tolerance for uncertainty.

Stay in the Game?

The older you get, the more experience you have.  I like using this to my advantage.

If you’re still new to the game, let me tell you a secret.  Stay in the game.  It doesn’t matter if stocks go up or down.  You can make money in all types of environments.

The trick is to stay consistent… especially if you’re YOUNG!

Use dollar cost averaging to buy into all types of markets.  Invest in low-cost index funds that will give you the ultimate in diversification and access to the strength of the stock market’s historical growth.

Final Thoughts

Everyone’s situation is different.  For me, because I’m not actively investing in the market, I’ve been pulling a little off the table the past few months.

I intend on using these profits when I see certain discount opportunities arise in equities and/or real estate investing opportunities.  Just bear in mind, this only a fraction of my portfolio and that I’m leaving the majority intact and exposed to the markets.

What are your thoughts on market uncertainty?  Do you embrace it, or do you tend to react?

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Michael

Hi, I have been blessed to take an early retirement in my mid-30's so I can focus on becoming a better father, blogger, and investor.

My goal is to help you find your personal path to financial freedom, and to enjoy the entire journey.

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22 Comments on “Should I Be Worried that the Stock Market Is So High?”

  1. I follow CAPE which I realize has problems. But based on CAPE, the stock market is likely overvalued. Another sign is Warren Buffett. He’s sitting on a huge pile of cash that he wants to invest but can’t find any reasonable priced companies to invest in..

    Anyway I’m not paniced. I just rebalance my portfolio once per year and I make a small, mechanical adjustment to my US allocation based on the level of CAPE.

    1. Thanks for sharing, Roger! I’ve heard of CAPE, but never looked at it closely. Seems like a worthwhile metric to keep an eye on.

      And glad to hear that Buffet is sitting on a huge pile of cash. 🙂

  2. I think you provided one of the best pieces of advice for young people who are investing – stay in the game. Keep investing even if the market turns down Historically, the market has continued to increase each year, so just continue to put money in and leave it there.

  3. There’s very little that’s certain about investing in, well, anything. I say look at the long term when investing and don’t get too freaked out by incendiary reports.

    1. Well said, MPP. There was a time in my life when I’d watch CNBC every day and try to “know” what was going on in the markets. In the end, it doesn’t matter if you’re drip investing over time.

      For where I’m at today, I feel more comfortable leaving some on the sidelines. And, that could prove to be costly. Time will tell. 🙂

  4. I have been waiting for a drop in the market. I am a try prponent of dollar cost averaging and since I am young I remain fairly aggressive with my investments. There likely will be a correction but I will not pull my funds out in anticipation. Who knows, this wave may ride for another year.

    1. You are correct, EJ, it could very well ride out another year (or more). I guess my appetite for risk has curbed a bit as I get older (gasp!).

  5. I don’t know about “locking in profits”, but I’m letting the cash pile-up a bit from dividends. There will be a recession again one day, I’m certain of that — economies don’t just continually march forward in endless progress.

    Right now, the hardest part of this “high market” situation is finding investments with reasonable metrics (e.g. a good earnings yield, growth rates, dividend yield, debt levels, etc.)

  6. Our plan is to “ride it out”. We are earlier in our investing and plan to keep moving forward with our investing, staying in the game throughout.

  7. We are staying in the game. While we are not so young anymore we are also not too old so we’ll just strive to keep a good balance and hold on.

  8. I do worry sometimes. People who don’t know anything about the stock market tend to ask why I’m worried when the stock market is marching higher and why I’m happy when the market trends lower. It sounds paradoxical, but it’s because the higher it goes, the more expensive I’m buying in at. And the lower it goes the bigger the discount I get. This mentality obviously works better the further away from retirement you are. It would suck heading into retirement in a prolonged “discounted” state, lol. As for me and the wife, we’re full bore on equities still and will continue to be for at least another 10 years before we move some over to bonds. We’re currently at 100% equities.

    1. You make a good point, Tim. It really depends on where you’re at during the cycle! If you’re close to retiring and need the value of your equities, I’d be much more conservative and taking even more off the table. I think your plan is sound. For me, I’m trying to transition some of the momentum in one market and potentially drop it into another (i.e. real estate a few years from here). We’ll see how it goes!

  9. I’m definitely getting nervous.
    On the other hand I have no idea when the dip/crash is coming, how bad it will be, or when it will recover.
    I’m only 40% public equity invested anyways so I plan to ride out the storm when it comes.

    1. Thanks for sharing, WD. With 40% in equities, you can feel pretty confident weathering any volatility. What other areas have you allocated your assets?

  10. I’m also nervous. Buffett and Apple are both sitting on enormous cash reserves because they see few great opportunities. My job is to continue investing and make sure I have an emergency fund.

  11. So far so good with the market. It’s been a great ride and most 401k’s are really enjoying this ride. i’m still at 80% equities and most likely stay with this until the end of the year. It looks to me though that the market will continue to perform well in the next 10 months. Tech is still soaring and artificial intelligence is very hot. Make sure that cash is available just in case something crazy happens (North Korea)?. Have you consider investing in cryptocurrencies. Really tempting and might pull the trigger.

    1. I haven’t looked at crypto currency too much in depth, but it’s a pretty cool concept. It’s amazing to see the price of out miss bit coin these days. Anyhow, it’s too much risk for me. 🙂

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