The Dow Jones Industrial Average (Dow) recently topped 20,000, setting a new record high and achieving a symbolic moment in US investment history. Investor sentiment has been climbing for a number of months, and a recent post-election market rally energized the Dow to finally cross this much-anticipated market boundary. The last time the Dow crossed such an important threshold was in 1999, when it hit 10,000.
This recent market movement begs the question of what happens next. Could this latest defining moment in the Dow’s history echo the downturn that followed 1999’s high point, when it took 11 years to re-secure the Dow’s standing of 10,000? Alternatively, will the momentum continue, extending the second longest market rally in recent times, and providing investors with increased opportunities for financial advancement?
Promises Of An Economic Revival
The Trump Presidential victory was a large catalyst for the recent market upswing, offering expectations of an economic revival. While it’s early in the administration, if one thing’s known for sure, it’s that the Trump administration is pro-business and pro-growth. These two factors are encouraging from an investment perspective. Campaign promises of more domestic jobs, lower taxes, less regulation and reduced infrastructure spending are all pro-business, and generally pro-investment. After several years of relatively stagnant growth, these initiatives could be the jolt that the economy needs to get its engines revving.
The Momentum Of Euphoria
Ideally, forecasts of a continued rally are based on market fundamentals such as growing sales and increasing profits. Recently, we’ve seen a recovery in profits, yet we continue to see sluggish sales, along with stock valuations that are a bit lofty, compared to historical averages.
While fundamentals might be mixed, it’s important to remember that investment euphoria has propelled markets higher through several periods of investment history. This latest market high could prove equally positive. Coupled with the potential pro-business policy actions likely to emerge from the White House, investment fundamentals could begin to improve. In the interim, the markets remain in anticipatory mode, potentially carrying investors along on a wave of stock market momentum.
Accommodative Fed Policies
While the Federal Reserve Board (Fed) has now raised rates twice, it remains in an accommodative stance, offering a low-rate environment to keep the economy growing. This posture could quickly shift, as the markets expect the Fed to proceed with additional rate increases, in line with the Fed’s projections for the coming year. While such increases could retard growth, it’s important to recognize that the economy currently continues to operate with supportive, ultra-low interest rates.
Also important is the fact that short-term rates remain below long-term rates, keeping the markets in potentially sustainable stride unless we see a reversal. In the event that the Fed raises rates quickly, a key indicator to watch is the yield curve. If short-term rates suddenly push above long-term rates, this will cause an inversion of the yield curve, an indicator that’s proven foreboding for market performance in the past.
Preparing For The Unpredictable And The Unexpected
If there’s one thing to be learned from the presidential election results of 2016, it’s the need to be prepared for unpredictable outcomes.
While there are many positive signals of higher peaks in the Dow and other market indices ahead, there are also many unknowns that could influence the investment landscape.
- There’s the potential to see a shift in five out of the top seven world leaders by year-end. Such seismic global political moves could herald a host of unforeseen outcomes for domestic and international markets.
- On a related note, we still don’t know the trade impacts of proposed new protectionist strategies here at home, nor the inflation effects of such.
The bottom line is that we’re in a quickly evolving investment space, with changes projected both here at home, as well as abroad. Investors need to stay attuned to changes and plan ahead, to ensure they’re prepared for an array of possible outcomes.
There are a number of positive considerations on the investment front. However, as with all market rallies, SageVest Wealth Management cautions investors to participate and enjoy the upside, while also preparing for the inevitable downside. This could be a time of renewed investment growth, but it’s not a time to become overly greedy – not when the markets are potentially richly valued.
The key to a winning strategy is to invest for the long-term, with a posture that allows you to profit from market upswings, yet with the flexibility to recover from a downturn. Most importantly, invest to your comfort level, where your investments work for you but still allow you to sleep well at night.
For further guidance, please contact us.