Consider this before surfing a surging Dow
Fears of momentum shifts rise on bull market milestones
While the Dow tops 22,000 and trading is at lofty levels never before seen, Main Street investors might wonder whether it’s too late to jump on the bull market bandwagon.
Market milestones such as “Dow 22K” have a way of attracting people’s attention. Some fear that the latest market milestone could be a market top. At the same time, fear of missing out on a rally that has found renewed momentum is also real.
Though no one — not even Wall Street’s top pros — has a crystal ball into the future, there’s no shortage of opinions on what investors should do.
History provides a road map for what derails bull markets and what investors should look for when trying to figure out how much time the aging bull has left.
Key things to consider at market
milestones:
u Time horizon. Investors need to consider what they want out of the market: Are they looking to book a fast profit or build long- term wealth? says Andrew Adams, a stock strategist at Raymond James in St. Petersburg, Fla. Given the Dow has risen more than 11% this year and tripled in value since March 2009, it likely will pull back at some point.
That means investors who dive in could get sideswiped by a market dive.
“The U. S. stock market isn’t likely to shoot up another 10% to 20% very quickly and will probably pull back a bit in the coming weeks and months, so it may be frustrating for anyone looking to get a quick gain out of stocks,” Adams says.
On the flip side, investors with time to ride out any short- term market storm should not rule out getting in the market now. Economies around the globe are improving and boosting the profitability of corporations in the USA and abroad, says Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners in Charlotte.
Zaccarelli won’t even rule out Dow 25,000 by the end of 2018.
u Health of economy and earnings. Key market drivers such as economic growth and corporate earnings must be considered. Both are healthy, which supports stock prices.
The pace of profit growth in the USA is the best in six years, and the economy grew at a 2.6% pace in the second quarter, up sharply from the first three months of 2017.
Based on the numbers, the market appears to be in solid shape.
“It’s still not too late to get in,” says Jeff Kleintop, chief global investment strategist at Charles Schwab, based in San Francisco. “The gains are firmly rooted in business fundamentals, not false hopes.”
u Valuations. The stock market isn’t cheap anymore — and is overvalued compared with its history — and that not only could limit potential gains, but it also could pose risks, says Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
“Valuations are stretched,” he says. “I’m not suggesting that markets have to go down, but upside is limited.”
Still, despite lots of attention paid to the value of stocks, it has proved to be a poor market- timing tool, says Paul Hickey, co- founder of Bespoke Investment Group.
“Valuations don’t typically cause rallies to end,” he says. “You have to have some sort of catalyst.”
u Signs of a top. The stock market tends to turn down when a recession is on the way, when investors get overly enthusiastic and dive into stocks blindly as they did during the 1990s dot- com boom, and when the market’s leading stocks and sectors start to retreat.
None of those warning signs is present at the moment.
“There are few signs that a major market top is imminent,” says Doug Ramsey, chief investment officer at the Leuthold Group, a money- management firm based in Minneapolis.
Given the market’s sharp rise, Ramsey says, he believes “it is too late for most investors” to get into U. S. stocks.
“Stocks are likely to be considerably cheaper in 2018, 2019 and 2020,” Ramsey says.