The stock market is hitting new highs. These market highs erase all previous coronavirus lows. Many are wondering how can the stock market be doing great while many Americans are still out of work, and experts worry about the potentially large numbers of evictions that may be coming.
The Stock Market Looks Forward
Many people forget, or don’t understand, that the stock market is a leading indicator. That means that the markets don’t really care about today per se. Rather, the markets look to the future. Knowing what IBM is trading at today, for example, is worthless to an investor. Knowing , or predicting, what the price of IBM stock will be in a month, or a year, is what allows investors to profit.
So, why is the stock market racing to new highs?
There are several reasons the stock market is rising.
First, the return on non-market investments is abysmal. Every article you read about the mortgage rates falling to new lows, also means that U.S. Treasuries are also falling. The rate on a current 10-year treasury bond is around 1/2%. Would you be willing to lock up your money for 10-years in exchange for half a percent? Neither are investors.
Other bonds are no better since most bond investments follow the fed rates. The only way to get higher yields in bonds is to take on more risk, but if you’re going to take on more risk, you may as well invest in stocks where there is more potential for higher rewards.
The second reason the market are rising is optimism that eventually, the damaging effects of the coronavirus are diminishing. That may seem crazy with the country wearing masks, and schools closing within days of opening because of covid outbreaks. However, businesses are opening. Restaurants are open, even if under tight restrictions. This means more money is going into the economy, even if it doesn’t feel like it on the personal level.
The third reason the markets continue to rise is defensive trading by large banks and computer programs. Remember, that the vast majority of volume on the markets these days comes from computer trading programs. Under current circumstances, the trends and models all point up in a self-fulfilling prophecy. The computer version of, “the trend is your friend,” ensures that those programs don’t bet too hard against a market turn.
Finally, keep in mind that, “the market,” as reported in the media actually means certain stock market indexes like the Dow Jones Industrial Average. These averages can often be overpowered by single stocks, or a small subset of stocks making it look like all stocks are rising when some are precariously placed (airlines), while others are simple optimism (Apple).
What Do I Do With My Portfolio As Stocks Hit All Time Highs
As always, long-term investors should have a well diversified portfolio that matches their goals and risk tolerance. When you have a portfolio like this, the short-term movements of the stock market are irrelevant. This is especially true if you are continuing to invest, like in a 401k or IRA, where dollar cost averaging is buying more low, and buying less high.
For shorter term investors, timing this market is like catching a falling knife. The factors that are making this market run higher are not solid and could change at any time. Obviously, with the economy teetering on the edge, the Fed won’t be surprise raising interest rates any time soon so that won’t be a factor. However, market sentiment about where things are going could change at any time.
Right now, sentiment seems fine, with no reason to change, however a single national, or world event, could knock that down at any time and the fall could be fast and scary. So, make sure you have stops in place on all your shorter term stock investments.
This article is for informational purposes only and is not a recommendation to buy or sell any investment. For specific advice on your person situation and investments, refer to your financial professionals.
The author does not hold himself out to the be financial advisor.