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Four Reasons Not To Give Up On The Stock Market

by Chris Poindexter

It’s risky calling ups or downs on the stock market because, to quote Jeb Bush, stuff happens. Were one to suggest that stocks are due for an irregular recovery the rest of the year, then almost certainly there would be headlines of a 100 point loss splashed across the internet. In these days of increased volatility such headlines, up and down, are an everyday thing.

So, yes, the stock market is going to recover in the latter part of 2015, but it’s not going to end up as a banner year. Next year, with the global economy slowing down, 2016 is not going to be a banner year for the stock market, either. 2015 is likely to end up near historical norms, which means a gain of 6% to 8%, possibly as low as 4% to 5%.

All the same that doesn’t mean you should give up on the stock market. The U.S. economy has one quality that sets it apart from all others and that’s the ability of U.S. business to reinvent itself nearly constantly. The creative destruction of capitalism harshly scrubs away the old and inefficient and brings in the shiny and new. The U.S. economy is a machine that rolls out new products and services and rewards those who invest in that dynamic engine. Although, admittedly, the rewards for the next few years will not be as lucrative as they were from 2009 to 2014.

The Economy Is Doing Okay

Overall the U.S. economy is strong. Sure, there are some weak spots in the employment data and personal income numbers, but I can think of few times in the last 40 years when that hasn’t been true. There has been a slight uptick in layoff announcements but not as many as one would expect in an economy headed for recession. The current layoffs are in line with an economy reaching the limits of an expansion rather than one sliding over the edge. Think back to 2007/2008, there were hundreds of thousands of layoffs a month. That’s what a crashing economy looks like.

Stocks Are No Longer Overvalued

The valuations on stocks composing the S&P 500 are coming back into line with historical norms. If you want to know where the market is heading, just look at the GDP. If the economy is still growing at a time when stock prices are declining then, very quickly, valuations are going to catch up to the size of the U.S. economy. It’s like two cars racing toward each other on the highway, the ground in between disappears in a hurry.

The Dollar Will Weaken

From 2013 to now the dollar has been on a meteoric rise to dizzying heights against other world currencies. That simply can’t last. The longer it goes on, the more a strong dollar impacts the value of U.S. goods and services overseas. It’s great that foreign investors have such faith in the U.S., but we can’t really afford to let out currency undermine our competitiveness overseas indefinitely. In the new global economy there’s no margin in being the bright and shining star of global currency.

Still Better Than Bonds

Even at 4% the stock market is still paying off better than bonds or money market accounts. Even during years of below average returns, like we’re likely to see the next few years, returns from the stock market will handily beat inflation and cruise past bonds, savings accounts and money market funds. For all the noise, the stock market is just a little below historical norms in returns. No, we won’t be seeing a return to the go-go years of 2010-2013 but historic returns on the stock market are still the best game in town.

The facts are times like these happen and there really aren’t any better alternatives out there.

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