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Are You Asking the Right Questions About the Market?

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Are You Asking the Right Questions About the Market?

As we passed the eighth anniversary of the start of the current bull market, it seems like a natural time to pause and ask: When will it be over, and what will foretell the change? As an investor, it’s always tempting to look for a sign that it’s time to exit the market.

While that’s a natural feeling, it would be the wrong strategy is to get “out” of the market — at least absent a full-blown recession. As we have stated repeatedly, staying invested will work better than trying to time the market. Many have tried timing the market, and not been successful. The occasional success at timing is merely an aberration, and cannot be sustained.

At this writing, the market appears to be taking a bit of a breather—hardly a reason for panic. April 13 marked the kickoff to the 1st quarter earnings reporting season, with banks being among the first to weigh in. The quarterly reporting cycle always prompts a media-fueled frenzy with analysts trying to predict what will happen for the rest of the year.

Trauma Recovery
 

To put things into perspective, first let’s remember a few important pieces of information. A significant number of investors were so traumatized by the rough 2008-2009 period that they still had a lot of their cash on the sidelines at the beginning of last year—earning a paltry one-half to one percent.

How bad is that? Maybe even worse than you think—unless you don’t expect to need to use your investments for a quite a few decades.

Remember the rule of 72: If you divide the annual rate of return on an investment into 72, you’ll learn how long it will take to double your money. So at 1%, it will take 72 years; 2%, 36 years; and so on.

Many of those who had stayed out of the market so long finally have been moving back in. That’s one reason we are not expecting see the bear market some have been predicting any time soon.

Also, on a long-term basis, the yield on 10-year Treasury notes has averaged better than 6.3%, and is now sitting at 2.4%. Although to the impatient among us it seems like we’ve been in a low interest rate environment forever, most people still expect more from government bonds. So until those yields begin to revert to the norm, a lot of people will be keeping their money in stocks, even if the pace of market’s upward climb cools off a bit.

Trump Bump
 

It’s true that the market received a psychological boost from the presidential election, with high hopes of more pro-business policies coming out of Washington. It has been a bumpy start for President Trump, and investors who were expecting an over-night change may have been disappointed.

Still, key economic indicators are promising:
 

  1. The unemployment rate is down to 4.5%.
  2. Non-farm payroll edged up another 98,000 jobs in March.
  3. The ISM (Institute for Supply Management) index, a much-watched gauge of the U. S. economy, is in its 94th month of expansion.
     

There are other indicators that the economy may start to cool off a bit, however; this is no time for “irrational exuberance” – to invoke the memorable phrase used by then Fed Chairman Alan Greenspan to describe the frothy market conditions in the late 1990s.

For example, both the New York and Atlanta Federal Reserve banks have downgraded their outlook for the U.S. economy a notch or two. But with your eyes focused on the horizon and not just on today or tomorrow’s headlines, and a dose of “rational optimism,” it becomes evident that the equity markets can be expected to continue to deliver the returns you will need to meet your goals.

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