The True Test Of The Stock Market Lies Ahead

Last week, the Dow Jones industrial average broke through all time highs.  The Dow hit highs in October 2007, but pretty much fell apart after that, spending the next several months in free-fall before beginning a slow recovery that’s taken the last few years to complete.

So, the first thing to keep in mind, is that while a new record is nice, it basically means that the last five years were a wash.  In other words, don’t pop the bubbly just yet.

Good media

Breaking a record always makes for good news.  Whether it was Michael Phelps breaking all the swimming records ever in the Olympics a few years ago, or the chase for the home run record on several different occasions, a ‘new record’ is always something the media loves to latch on to.

While all that is good information to read, it really doesn’t mean anything to me.  The stock market is just a number

What lies ahead

The true measure of whether this new record is important will be in whether the record stands, and whether it continues to set new records.  In 2007, we set a new record at that point.  People probably felt pretty good about that at the time, just like they do now.  Then, the Dow lost over half of it’s value.

That’s right, over half.

That record didn’t seem all that special back when the Dow was losing a couple hundred points a day, every single day in a row.  Those days sucked.

I don’t think we’re in any danger of that type of event happening now, but I do worry whether this record will stand.

The volatility of the stock market has increased quite a bit over the last couple of decades.  From the tech bubble of the early 2000’s to the increase in accessibility brought on by online brokerages, to the proliferation of computers running high frequency trading algorithms, the amount of information and accessibility has increased exponentially.  This leads to increase volatility.  Just the whisper of something ‘bad’ can ripple through the stock market in mere seconds, and can create a domino effect where, once things start heading down, sell orders kick in and keep things rolling on a downward spiral.

These things rarely happened before accessibility was so common.  Therefore, when I see the market reach new highs, I also know that there’s always a good chance that the market could drop a few percent, and often for no ‘real’ reason.

Europe is still out there

One of the things that constantly worries me is the effect of Europe.  Over two different occasions in the last several years, the stock market has gotten spooked by events in Europe surrounding the various economic problems of countries like Greece and Spain.  These things have largely stayed out of the news, but if Europe starts hitting the news again, you can bet it’s probably not going to be for reasons that will impress Wall Street, and if history shows, the reaction could be swift.  In fact, since the market has gone down that road before, any bad news could have investors and computers lining up to hit sell even faster than they did the first two times.

Such news would likely send the market lower.

Health care is coming

Health care reform is coming whether we like it or not.  Things will change over the next 12-18 months as some of the major laws are put into play.  How these things will play out is a question we really don’t know the answer to.  This does not bode well from the stock market, which does not favor any type of uncertainty.  As we get closer to some of these laws and as discussion starts hitting the waves on what this could mean to the economy, this could spook the market as well.

The deficit is still there

The market has been OK with the $16 trillion and counting deficit, and the Fed has done their part to keep a bad situation from getting worse, but the fact is that the annual deficits could get much worse if interest rates go up.  The Fed has been able to control this, but if they can’t, this would send interest rates higher, leading either to even higher deficits, big cuts in spending, or increased taxes.  All of these things are options that Wall Street looks upon with disfavor.

Am I a bear?

With all this being said, you might think I have a negative outlook on the stock market.  Quite the opposite.  I think that some of these things will come into effect to some degree, and down the line some of these may hit in a fairly negative way, but in the short term I think the items I listed will be held in check, and that the enthusiasm surrounding the market will lead the market higher.

For now.

What do you think about the stock market?  Are you a bull or bear?  Do you think that if triggers do send the market in a negative direction that you could ‘get out’ in time to avoid substantial losses?

16 thoughts on “The True Test Of The Stock Market Lies Ahead”

  1. I think I’m pretty bearish on the market as well. I just don’t think that this increase is based on anything real. Interest rates are ridiculously low, unemployment is still high, etc. etc. etc. But, what do I know? 🙂

  2. Debt is the biggest economic issue. That includes the worrisome European debt, the American debt and the personal debt level of the citizens.

    This economic rush is not balanced on a firm platform.

    World politics worry me as well. If there is another war then that will run Americans and other countries further in to debt.

    I am working hard to eliminate my personal debt. I wonder when countries will do the same and politicians will stop worrying about getting elected and start worrying about the future of their countries in 20 to 100 years.

    • I think that’s the biggest thing is to take care of your own financial house, even though it’s apparent that the governments in charge are not doing the same. The best thing there is to keep informed and have triggers in place that would allow you to stay safe if (or presumably when) the bigger market forces try to drag down individuals and families.

  3. I’m agnostic. I think that the market will go whatever way it is directed to by the larger economic news. For example, Europe is still there, but so long as it doesn’t start publicly flirting with default again I don’t expect the market to budge. Overall, I’m not that concerned about whether the market goes up or down. Given my strategy of focusing on high quality dividend paying stocks for the long-term, I wouldn’t mind seeing the market come down a little so that more great companies become fairly or under valued.

  4. Great points about what’s coming down the road. There’s so much I’m also agnostic. I’ve been wrong so many times predicting the market that I now just keep a fairly defensive stance all the time. My goal is to get about 70% of the market upside and about 30% of the down….over time I then (if the plan works) beat the market and make my goal. If it doesn’t work, then hopefully I have enough money left to buy a tent!

    • If you can play that to success every time the market takes a turn, you’d be very well positioned as the years went by!

  5. I am definitely more bull than bear! The stock market is a reflection of good corporate earnings. Will they continue? I think they will and I expect it wil be better as the economy improves too.

    • I hope so. I have always said that the economic recovery would be slow but would likely be built on a more solid foundation that would lead to long term stability. It wouldn’t be a pretty recovery but would be worth the slow build. The only ‘issue’ I have that could threaten it is the government and the huge deficits.

  6. Hmmm…. Well, I figure what goes up must come down, so I’m not exactly dancing in the streets. Much as I do appreciate the amazing bottom line on my January & February statements…

    As for the effects of the health care changes, sequestration seems to define “uncertainty,” and so far it doesn’t appear to be disturbing the market. What will happen if we default remains to be seen. But I see the conflict and ineffectualness of our leadership as a bigger potential problem for the economy than health-care reform per se.

    Well said about getting one’s own house in order and keeping it so!

  7. I too am troubled by the stock market’s enthusiasm. What happens when “Uncle Ben’s” program of lending money to Banks for 0% falls out of favor and lending rates to Banks return to historic norms …say 4%….and mortgages then return to 6.5 to 7%. Add a little pent up inflation because of the policies in place and it’s that “70’s show” all over again…..”stag-flation”. Hmmmm….. and wonder what this increase in interest rates does to the world’s biggest borrower…the US goverment. Just run the numbers on our debt if and when the rates on debt returns to the 6 to 7% range….it’s scary.

    • It is very scary. My hope is that the rates can hold for at least a few more years. Right now the president and Congress have no idea what they’re doing in this regard, and hopefully in 2016 we can start righting the ship.

  8. The stock market is a rollercoaster! I have no doubt that we are due for another crash sometime, then new records, then a crash, etc! The important thing to note here is that over the long-haul, returns are high for the market. Investing is not for the faint of heart and as long as you have a long-term strategy you should come out on top.

    • Agreed, a long term strategy is very important, and it’s just as important to check that strategy regularly, especially as your needs change and every year that you get closer to retirement.

  9. I can not say whether I am a bear or bull. I would say that with solid research investing in any market can be profitable. I have one nagging question on my mind. Maybe it is naivety, but doesn’t it seems as if the abundance of available cash from retirement funds may have inflated the value of many stocks? Retirement funds are a necessary part of a personal financial plan, but I am curious on that point and have never seen any related research.

  10. What I have in stocks right now is mostly in my IRA, which won’t be used for many years. Up and down really isn’t a big deal. Really any big event or disaster could send the market into another dive. I think rental property is my best investment right now.

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