Does Dow 23,000 Mean the Market is Going to Drop?
Short answer, “no.” Just because markets have been going gangbusters for the last half decade, it doesn’t spell the end. Just because investors has gone nuts, there is no reason that they can’t continue to go nuts in the short term. The long answer is much more complicated.
Let’s dive into the long answer by going over a few frequently asked questions:
1. Why is the market up so much?
A: Multiple reasons. The most glaringly obvious one seems to be that economic conditions have been relatively good for a long time. Companies are making money, and up until now the valuations of companies have been supported by their earnings. With low interest rates, money is still very cheap.
2. Can the market still keep going up?
A: Yes it can. But if you are asking “Will the market continue to go up?” the only real answer is “I don’t know.” Anyone who tells you differently is probably selling you something. The market can still keep going up. During the tech bubble building there were many people saying that the valuations didn’t make sense, but for years the market kept building…until it didn’t. We may have a similar situation going on. Right now it seems that the markets are waiting for an eventual change to the corporate tax structure that may or may not actually happen. Wall Street analysts seem to be less and less hopeful than Trump will deliverer on any campaign promises.
3. What about interest rates?
A: Interest rates have continued to be historically low. There has been some chatter over the last few fed meetings about inflation starting to show some signs of coming back. But The Fed Chair, Yellen, is up for reappointment…and it is assumed the person nominated for Fed Chair by the Trump Administration will want to keep interest rates as low as possible to aid in a Trump reelection. Keeping rates as low as possible to aid a political candidate would be on shaky legal ground…but that is par for the course lately, with Congress unwilling to put any checks and balances on the White House, it is assumed that the next Fed Chair will push for low interest rates.
So what does all of this mean? Should I invest more in stocks? Should I put my money in a mattress? Most long term investors should not be making any big swings in the way that they are investing money. Chances are that most investors have made a killing since the end of that financial crisis. If you have been taking more risk than normal with your investments it may be a prudent time to reassess how much risk you are taking. If you have been taking moderate amounts of risk, I wouldn’t be suggesting to take more.
It is always a good time to take a look at actively managed mutual funds and consider moving the assets into index options. There is a lot of data suggesting that the fees associate with actively managed funds hurts the long term performance relative to benchmarks. There is also a lot of evidence out there that professional investors tend to make really bad decisions during times of market volatility. If you can get out of actively managed funds and into indexes without tax consequences, have at it.