Some of the most frequently asked investment questions I’ve gotten lately are, “What is driving the stock market up?” and “When do you think it will come down?” The answer to the first question is two-fold, hope and interest rates.
The stock market is a forward-thinking animal. It rises and falls on what investors think will happen to the economy over the next 6 months. Whether you’re happy with the new administration or not, Wall Street is hoping all the talk about lowering corporate taxes, bringing back jobs and lots of spending on infrastructure and the military will be good for the economy. That may be true, but the stock market can’t rise on hopes forever. Most of the things Wall Street is hoping for haven’t transpired yet and there are no guarantees they will. At some point, stock prices must be based on market fundamentals such as corporate earnings. If the price of stocks gets too far out of line with actual earnings, and there are no other reasons supporting its valuation, the market will pull back to adjust for that.
The other reason the stock market has done so well lately is that interest rates have been low for so long that stocks, by comparison to bonds and cash investments, look very appealing on a risk/return basis. The best rate on a one-year CD right now is about 1.25% and with the 10-year Treasury bond yielding around 2.36%, investors seem willing to assume a little more risk to get potentially better returns in the stock market. So investors have driven the stock market up for no other reason than there have been few other options available to them.
The answer to the second question, “When will the stock market come down?” is I don’t know. Nobody does. But it will at some point, as it always has once a bull market peaks and prices are no longer supported by current earnings. And this has been one of the longest-running bull markets in history. There have been a few minor pullbacks that were short-lived (oil prices, Brexit and the election), but for the most part, the market has been in a bull market since it hit bottom in March of 2009.
As investors, we will always seek to know what drives the market up or down. Since we can never perfectly know the answer to that question, it’s all the more reason to have an investment plan that’s consistent with your risk tolerance, your time frame, and is properly diversified. Let a well thought out plan drive your investment decisions. Remember, it’s time IN the market, not timing the market.
Linda Eden-Wallace is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
Copyright ©2017 Linda Eden-Wallace. All Rights Reserved. Commercial copying, duplication or reproduction is prohibited.