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Stock Market - Time to Celebrate or Plan the Funeral?Submitted by Townsend Asset Management Corp. on August 8th, 2017
The Dow Jones Industrial Average recently topped 22,000, surging past its fourth 1,000-point milestone since the Presidential election. Now, you might think this would make the average investor very happy and perhaps overly aggressive, but it seems to be the opposite.
Over the past month, small investors pulled $17 billion out of U.S. stock funds and added $29 billion to bond funds. Note that this has been going on for some time now. Since the internet-stock bubble burst in 2000, investors have withdrawn half a trillion dollars from U.S. stock funds. So, the stock market has risen dramatically not because of small investors, but despite them.
Many investors are still financially and emotionally scarred from the 2007-2009 recession and have remained either out of the stock market or have only tip-toed back in. With the current economic expansion currently the third longest on record and set to become the longest in a few more quarters, investors are nervously looking over their shoulders, expecting a bear market attack.
Economic expansions and contractions come and go – it is like someone breathing – so there will be more recessions and expansions in the future. However, expansions don’t die from old age, and the current expansion appears to have legs to run a while.
The slower the pace of a recovery, the longer it takes to absorb economic slack – and the longer it takes to reach full capacity and ultimately the peak that signals a cycle’s end. If instead of measuring the current cycle in terms of time, we used a different measure, the current cycle would appear to just be middle-aged, not old. Measures such as GDP growth, inflation, interest rates, wage growth, etc. all point to a much younger cycle.
Even with the current cycle not yet ready for an obituary, many investors question why the stock market has kept rising. A few thoughts on that:
Corporate Earnings – Ultimately the price of any stock is directly linked to the earnings growth of a company, and continued strength among U.S. companies is fueling gains.
Global Outlook – The U.S. is further along in its economic recovery than other nations. While our slow expansion is expected to keep chugging along, global growth is projected to pick up, helping multinational companies.
The Fed – At the moment, we are in a sweet spot with the U.S. economy expanding, but not so fast that the Fed should be raising interest rates too quickly. The cautious approach of the Federal Reserve is a boost to “risk” assets, such as stocks.
Few Alternatives – With uninspiring current yields on bonds and the expectation for interest rates to gradually trend upward, stocks have remained a favored asset class.
This does not mean that you should throw caution to the wind and throw everything into the market. There is a reasonable balance between safety, income and growth assets that each of us needs to maintain – and everyone has their own unique financial situation, goals and tolerance for risk in general.
However, it does appear to be way too early to plan the funeral for the current economic expansion.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com