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.
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.
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?