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.
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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