Investors have a lot of questions about what they should do right now following the post-election surge in the major stock market averages. You may be wondering what your next move should be or if there is a next move you haven't even considered. Since a bull market strategy is as important as a bear market strategy, check out these FAQ's to see which one could be suitable for your situation.
1. Should I sell now?
a. If your time horizon for a certain goal is not far away and if the soon to be needed funds are invested, you need to strongly consider selling stocks. If your time horizon is 12 months away or less, then I say yes.
b. If your time horizon is a long way away and you are a decade or more from retirement, then no.
c. If you are near or in retirement, you should look to see if your allocation of stocks, bonds, and cash is appropriate for your risk tolerance. If it is, sit tight. If it isn't, then you should rebalance now to whatever your appropriate asset allocation is.
2. Should I buy now?
a. Every time I have seen a new all-time high in the major averages, there is always someone shouting "what goes up must come down!" On a temporary basis, that has happened many times; stock market corrections, defined by a major average declining by 10%, have been a part of markets for as long as markets have existed.
If you're overloaded on stocks already, especially for those passive income seekers who've binged in dividend stocks over the last 8 years, I'd say no. Better to rebalance or change your investment mix away from what has worked to what could catch up is a reasonable thing to do.
c. The world doesn't have a lot of successful market timers. This is why I don't condone "all in or all out" as a viable strategy. Raising some cash to de-risk or to rebalance one's portfolio is called risk management and is prudent as long as it is based on your situation. If you're still on the sideline with too much cash and you're perpetually waiting for just the right moment to invest in stocks, you should consider Dollar cost averaging or use pre-programmed below-the-market buy-limit orders to invest now. This could help you by getting over your fear of making a mistake and give you a much needed dose of discipline.
d. Younger investors, the answer is yes, you should buy now. Warren Buffett once said "if you think stocks are expensive today, just you wait and see how expensive they'll be in 20 years". I've said to many a millennial friend, you should hope we see stocks go down a lot. Some of the best buys I've ever made were 1990/1991, 2000/2001 and in 2008/2009. Of course this makes sense, but believe it or not, opportunities like those don't come around often.
3. Is the stock market up too much, too soon?
a. The S&P 500 was up a touch under 10% in 2016, more or less in line with its long term average. Based on that, no.
b. Consider that the stock market was range bound for about two years before the November, 2016 election. Markets can correct in one of two ways; they could retreat by 10% or more (which it did, early 2016, by retreating about 10%), or they can stay range bound for a long time.
c. If 2016's stock market returns came more evenly during the whole year instead of being backend loaded in the fourth quarter, it's fair to say investors would be more comfortable with the year's performance. But that is not unusual in stock market history. Annual returns are often sporadic, unpredictable, and compressed into short time spans. Based on this, again, the answer is no.
d. To state the obvious, the stock market could give back its recent gains. The fact is that market moves are often in search of a reason and those reasons change over time. Markets pause, rest, rebuild, correct, advance, retreat, and confound all the time. The next time any of those things happen, keep in mind that the reason will be multi-faceted and complex.
4. What's behind the recent stock market advance?
a. First, the advance actually started a little while before the election. Economic statistics for manufacturing, wages, inflation, and GDP were all solid or moving higher when last reported.
b. The Trump victory signaled to investors that policies will be enacted that should keep those aforementioned stats positive and probably cause them to accelerate. Continued growth in a low interest rate/inflation environment is a Goldilocks scenario for investors.
c. Since the election, nothing has really changed regarding any US policies toward anything. But psychology, which has always been a critical driver of stock market performance, improved.
d. Banks and industrial companies had a lot of difficulty generating returns for shareholders, so they turned to financial engineering in the form of stock buybacks, which were in the Trillions of Dollars over the last 8 years. Since the end of the Great Recession, companies were bigger buyers of their own stocks than investors. Once investors finally became net buyers of stocks, right after the election, the demand/supply balance for stocks was a major contributing factor behind the advance.
5. What could send this stock market run-up into reverse?
a. Getting legislation and policy through the meat grinder that is Congress won't be an easy task and is one of several major risks to the stock market. Some pundits say that January 20th, inauguration day, is the expiration date to the current advance. Some say the end of soon to be President Trump's first 100 days in office is the expiration date. In the meantime, expectations are running high for corporate earnings, so disappointment in that is another point of concern.
b. The FED could take away the punch bowl by raising rates too quickly and too high. Unfortunately, this too is quite common. But the good thing for investors who are afraid of down markets is that with interest rates in Germany and Japan so low, our Treasury securities are still very desirable to foreigners seeking higher income. In a sense, our stock market run is dependent on the European Central Bank and the Bank of Japan maintaining their ultra-easy monetary policies (meaning, they're keeping their interest rates super low).
c. A trade war could hurt. A mild one that is more about the optics of political leaders looking like they're willing to play tough guy probably wouldn't hurt the economy or the stock market much. It would have to be a big one. Plus, if a trade war slows our economy, that could keep the FED on hold for longer than we expected, which, in turn could be supportive of stocks.
Investing is a marathon; different stages and time horizons, and everyone runs in it for their own personal reasons. This isn't meant to be personalized investment advice, but I sure hope it added needed perspective to help you address some of your concerns. If you want to talk about your questions and concerns on a more personal level, all you have to do is call 631-920-6622.
Source: U.S. Dept. of Labor, U.S Dept. of Commerce, Institute of Supply Management