Yes, it might keep going up.
It also might not.
As you might guess, there is one particular question planners get all the time, but it’s one we won’t answer definitively: Where is the market is headed?
Over the long term, stocks are good investments for most people to hold, and the historical data bear this out. But when asked for an opinion on the market’s direction, people are usually asking what’s going to happen over a much shorter period, like from now until the end of the year.
We understand why people ask. Financial advisors watch the market every day and keep up on all the news about the economy. So there is this expectation that we have some sort of forecasting ability.
Irving Fisher was an early twentieth-century economist. Milton Friedman, who won the 1976 Nobel prize in economics, called him “the greatest economist the United States has ever produced.” In 1929, three days prior to the crash, he said that “stocks have reached what looks like a permanently high plateau” (CNBC: “Spectacularly Wrong Predictions”).
Seventy years later, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market hit the shelves in 1999, near the height of the dot-com boom. We believe we will one day surpass 36,000 too, but considering that 17 years later we’ve “only” reached around 18,000, and have lived through the dot-com bust and the Great Recession, we’re not about to try to predict when that will be.
Then just a couple weeks ago, there were two conflicting headlines on a prominent business website: “S&P 500 hasn’t done this in 40 years—and it’s a bullish sign,” and “These telltale market indicators suggest stock prices are topping.” Well, which one is it?
We could keep having some fun with this, but you can see that the point we’re making is that market timing is an exercise in frustration more likely to be a detour on your financial road map than a great call.
An all-time high–how should I react?
The recent upward move in stocks comes at a time of immense uncertainty. Lingering worries about the global economic outlook haven’t subsided, China is still a concern, and Europe’s slow economic recovery and fragile banking system are problems that won’t soon be resolved.
However, the U.S. has been and remains the best home in what could be called a rundown neighborhood. It’s somewhat counterintuitive, but a post-Brexit-vote world may actually be helping stocks in the U.S., as nervous cash in Europe seeks safety in the U.S.
And it’s not all gloom. The U.S. economy may be expanding at a subpar pace, but it is growing, and the consumer is leading the way, which supports corporate earnings. More importantly, analysts are cautiously forecasting that the four-quarter earnings recession appears set to end in the current quarter.
So what should I do?
As the economic recovery enters its eighth year, the expansion is no longer young. It’s been a substandard economic recovery, global uncertainty is high, and we are in an unusual election cycle.
Because market timing is futile, we continue to strongly encourage a diversified portfolio that encompasses assets in the U.S. and abroad, as well as alternatives and bonds. We will eventually enter a recession. When? We don’t know, but it will happen eventually because it’s an inevitable byproduct of a free market economy.
The Strategic Edge approach
The asset allocation strategy at Strategic Edge, as mentioned, groups assets into four primary categories: U.S. Growth, Global Growth, Alternatives, and Fixed Income. The U.S. and Global categories look for growth-oriented equity investments but can also include some value-oriented investments to take advantage of companies with good growth potential that may also be undervalued.
Alternatives are used as a portfolio stabilizer. Broadly speaking, alternatives are assets that are not stocks, bonds, or cash. They are included in most of our portfolios as a hedge for when stocks and/or bonds drop, because when that happens, assets like commodities and real estate tend to have the potential to rise. So alternatives hedge against market volatility. Ideally, they earn a return at any time but especially when the market plummets, which in turn can help keep your portfolio balanced.
In the bond category, we look for well-performing, quality bond funds that can provide returns that meet fixed income needs.
How much of each category you have is dependent on your tolerance for risk.
Contact us any time for a free consultation to go over your financial goals and risk tolerance, and to see if our approach might be a good fit. We are located in Rosemont, Ill., near Mannheim and Higgins, and are also always willing to meet somewhere other than the office if that would be more convenient.
Find us on Facebook
Look up Strategic Edge Wealth Management, LLC and like our page. A few times a week, we share information on topics related to investing, retirement planning, money management and estate planning, and link to articles from business media that we think you might find interesting.
