On December 11th, 2013, when the Dow Industrials were at 15,843.53, I made series of observations about the economy that were overall positive, but also allowed that a correction for profit-taking and valuation adjustments was possible. I put my money where my mouth was back then, and committed a fairly sizable chunk of our free cash to the stock market.
Less than a month later, in January of this year, the Dow dropped to 15,372.80, down 3% from where it was in December. That was not a very promising start; the red ink on my portfolio numbers was hard to ignore, but I stayed with it. If you invested in the market back in December and stayed with it through the January correction, today you’re up roughly 7%, not counting dividends and capital gains distributions, which is not bad for seven months. One reader called me delusional, although he waited until May, when the market was already up 4%, to do so. That’s the kind of delusion I can live with — and it points out the danger of making investment decisions based on anything other than cold, hard facts.
Dow at 17,000
The Dow hit record territory earlier this month, before settling back to where it is today. The market picture we’re looking at now is far murkier than it was at the end of 2013, and there are good reasons to be cautious. Let’s look at the 20,000 foot overview, the good and the bad.
The Economic News Is Still Pretty Good
Consumer spending is up but, more importantly, consumer confidence is up, reaching its highest levels since before the recession. In an economy where consumers are the geese that lay golden eggs, that’s definitely good news. Despite the efforts of the financial entertainment industry to throw mud on the employment numbers, there’s no denying the job numbers are better. How much better is debatable, but it’s a lot better odds competing against two or three other qualified people for a job opening than seven or eight.
The employment numbers were good enough to prompt the Federal Reserve to announce the end of Quantitative Easing in October. Interest rate hikes won’t be far behind.
The downside to the consumer spending numbers is they’re a backward-facing metric. Let’s face it, most people are really bad at investing, and when the panicky herd is feeling fat and content, that’s when I get nervous.
Everything Is Expensive
Value investors are having a hard time finding anything that’s not overpriced in today’s stock market. Prices have gotten so high that many companies have curtailed buying back their own stock, one of the big drivers in recent stock market gains. Coupled with that, the market is overdue for a correction. Corrections are like the safety valve on a pressure cooker, they let off steam. The longer the market pushes ahead without a significant correction, the worse it’s likely to be.
Trouble Abroad
Tensions in the Middle East could easily be the trigger that sets the equity markets on fire. If the fighting in Iraq spills over into the southern oil fields, we could see a gas price shock that would knock stocks for a loop.
Equity Growth Will Slow
The stock market simply can’t keep going like it has been and, not only will there be a biting correction, but growth will return to something resembling normality through 2014 and into 2015. In fact, we could be on the verge of a very long period of backfilling, where returns are flat to slightly down, a period that could last for years.
It Might Be a Good Time to Rebalance
If you haven’t rebalanced your portfolio recently, now might be a good time. If you’re going to need cash for a big purchase anytime soon, skimming some profit isn’t just for the big players. While I might go ahead with dollar cost averaging purchases now, I’d only do that for money I’m sure I won’t need in the next five years. Other than dividend reinvestments, I’m not sinking any additional free cash into a market this expensive.
If you’re behind on the fixed percentage of your wealth that you keep in hard assets, now might be a good time to consider shifting some stock market profits to quality gold and silver bullion products. If you’re nearing retirement and want to protect a portion of your IRA, consider shifting some of that money to a gold and silver IRA. All of those are sound, sensible financial moves anyway, so now is as good of a time as any.
What am I doing? Other than normal rebalancing, nothing. Yes, I know the correction is coming — but we don’t need the cash right now and could hold out for five years or even ten. It wouldn’t be fun to ride out another 2008-style recession, but we could manage. In my rebalancing I did shift toward sectors that pay good dividends and caught up on my hard asset allocation, but I haven’t pulled any big money out of the market, knowing full well a hit is coming.
I guess we’ll find out in the months ahead whether that was prudent or delusional.
