Time to cash out?
Advisers say the market can still climb, but this might be a good time to collect on gains
The Dow Jones industrial average barreled across another milestone last week — 22,000 — seemingly unfazed by discord in Washington, D.C., and international threats like North Korea.
It hit that level only about six months after reaching 20,000 for the first time.
But can it keep this up?
In a word, yes, investment professionals say. But investors shouldn’t be afraid to lighten up a bit on stocks if the Dow’s fast climb and share prices are making them nervous, some said.
“An investor today should be wary of these high valuations,” said Sara Walker, senior vice president and investment officer for Associated Wealth Management. “But I also think that this could keep going.”
The Dow, an index based on the performance of 30 large companies, hit 22,000 on Wednesday. Its rise to that level was powered by a number of factors, not the least of which were strong earnings reports for corporations, interest rates that remain low and good sales abroad for some of the Dow companies, analysts said.
The Standard & Poor’s 500 Index, which reflects more broadly how the stock market is faring, also is up, as second-quarter
earnings look better than expected for many companies.
“We’ve had a little over 400 of the 500 stocks in the S&P 500 report earnings for the second quarter, and the earnings growth rate so far is about 11% year over year,” said Brian Andrew, chief investment officer for Milwaukee’s Cleary Gull Advisors, a unit of Racine-based Johnson Financial Group.
High hopes and low expectations
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, said the market has “continued its ascent on the back of decent economic news.”
He said profits for major companies are helping to give a fundamental foundation for the market, but the market is driven more by how investors feel than by fundamentals in the short term.
“Coming out of the election, people had high hopes for tax cuts and regulatory relief,” Jacobsen said. “Investors have shifted from high hopes to low expectations about what might happen in terms of policy changes. Thankfully, the global economic data has been improving to help propel the market higher.”
Willie Delwiche, managing director and investment strategist for Milwaukee’s Robert W. Baird & Co., said the new Dow milestone ”comes at a time when everyone is optimistic about everything.”
“From a contrarian perspective, it’s a little bit of reason to step back and reevaluate,” Delwiche said.
Delwiche said it might be a good time to reduce exposure to U.S. stocks and diversify with shares of some international companies.
“If you’re sitting on things with good gains, maybe now’s the time to take a little bit of money off the table,” Delwiche said. “It’s not a reason to get really bearish, but
just acknowledging that maybe the risk-reward dynamic for U.S. stocks has shifted a little bit more towards the risk side and less toward the rewards side in the near term.”
Walker, too, said with stock prices relatively high, it’s OK for consumers to sell some and take cash if there are some big expenses on the horizon.
“I advise people to stay in the market, but if they know that they need some cash — they are anticipating buying a new car or a second home or paying the child’s tuition bill — let’s raise that cash now,” Walker said. “Take advantage of the strong market and raise what cash you might need.”
But don’t abandon the stock market, she said.
“You never bet the farm. Be reasonable,” Walker said.
Jacobsen said he doesn’t think investors have become too optimistic.
“People point to different valuation measures, like prices relative to the last 12 months’ earnings, and see that valuations are elevated, but I think investors are looking out over the next few years rather than looking in the rearview mirror at earnings to justify higher stock prices,” he said. “If inflation stays low and economic growth picks up, corporate profit growth could accelerate again.”
Still, he said, if investors are worried about a giddy market, there’s nothing wrong with shifting out of equities and into higher quality, highyield bonds.
“High-yield bonds don’t offer the same return potential as stocks, but they generate more income than you’d find in the Treasury market,” Jacobsen said.
Andrew said investors should keep in mind that when growth is slow — economic growth is in the 2%-2.5% range and inflation is 1% to 2% — “the whole business cycle has smaller peaks and valleys.”
“It argues that we could continue to see this for a while,” he said.
Cheerleader effect?
President Donald Trump has claimed some credit for the rise in the stock market. Is it justified?
Walker said that while Trump’s pledge of tax reform hasn’t come to fruition yet, his role as a cheerleader for lower taxes and less regulation may have had an effect on the stock market.
“He hasn’t accomplished those yet, but just the talk of that is a shot in the arm for the stock market, for stock investors,” she said.
Said Delwiche: “I think generally the presidential impact on the stock market for good or for bad is overstated.”
“Politicians love to take credit for good economic and market data and to place blame for bad data,” Jacobsen said. “While expectations of policy changes may be helping some parts of the market, like small cap stocks which tend to be more heavily taxed than large cap stock, the broader market is being driven by bigger forces than politics.”