In case you hadn’t heard, the U.S. stock market has been on a tear: In the span of one week in mid-August, all three major indexes—the S&P 500, Nasdaq and Dow Jones industrial average—posted record highs on the same day…twice.
“This is significant because we [were] at all-time highs, and you usually don’t see a bull market where everything is up, including bonds, stocks and gold,” says Chartered Financial Consultant Chris McMahon, founder of McMahon Financial Advisors in Pittsburgh. “Also, the record market growth seems to be flying in the face of relatively strong headwinds, with slow economic growth all over the world. But right now, investors are focusing on the positives—stimulating more growth.”
While the Great Recession remains a recent memory, August’s highs actually punctuate a significant period of market growth that began in 2009. The current bull market has become the second-longest ever. (By the way, a bull market is a period in which the value of the market increases at least 20 percent.)
However, ups—and downs—are the nature of the market, so you may be wondering how long this growth can continue. Let’s start with some background.
What’s actually driving market growth?
Although U.S. economic growth is essentially stagnant, our economy is still stronger than others around the world. And that is, in turn, leading more investors to pour money into U.S. stocks. “Most of Europe is a mess and Italy is a train wreck right now,” McMahon says. “People are afraid to invest anywhere else, so that’s driving growth in our market.”
In addition to a lack of alternatives, the U.S. stock market is strong because it has remained relatively stable over the past few years, which encourages investors to stick around, says Tim Courtney, CIO of Exencial Wealth Advisors in Oklahoma City. “Since 2011, stock market valuations have been reasonable; they’ve never gotten too high, like they did in 2000,” he says.
Got it. So how long will this last?
Markets fluctuate based on a variety of factors, so it’s difficult to predict how long we can expect the current upswing to hold. But plenty of analysts are speculating.
Some, like Howard Silverblatt of S&P Dow Jones Indices, predict that the Dow will reach 20,000 in the next year. (The Dow was hovering around 18,550 in mid-August.) Others expect the market to level off in the coming weeks and months. For his part, McMahon expects to see some profit-taking (meaning the sale of stocks that have risen in price) at the end of the third quarter, and if investors begin cashing out, growth will slow. “But the earning season [when major companies report their quarterly and annual earnings] will be as good or better than people thought it would be,” McMahon says.
Of course, much will depend on new developments, like the pending presidential election, upcoming decisions made by the Federal Reserve and the global economy. “But the odds are that these markets are going to continue to rise until interest rates rise meaningfully,” Courtney says. “If people could go out and get a bond with a 4-percent yield, for instance, we’d probably experience a market correction.”
(The “Fed” controls the rate at which financial institutions lend money to one another overnight, and that rate—currently set at .25 to .5 percent—influences other short-term interest rates, including those for savings accounts.)
Yet regardless of what the future holds, advisors like McMahon emphasize, as always, the importance of maintaining a diversified portfolio and focusing on a long-term investment strategy, rather than attempting to time the market by buying and selling, based on the ups and downs of the market.
August 17, 2016