Oct 10 2017
I can understand why most investors questioned the viability of rising stock prices last year, given that it coincided with the surprising (to most) election of Mr. Trump. The initial rise in stock prices, referred to last fall as the “Trump Bump,” has seemed to take on a life of its own despite Trump’s inability to get anything done on Capitol Hill. Today’s doubters are understandably under invested and paying dearly for it. Years like these don’t come often. If history is a guide these doubters will eventually capitulate and embrace the steady rise in stock prices for one main reason: the recovering business cycle and increasing corporate profits support higher stock prices.
Though the earnings recession and market decline of 2015-16 was unusually mild, it did constitute a bear market and recession in our book. This very well may be another point of confusion for the average “doubting” investor who thinks that this bull market started in 2009 and is the longest bull market in history. The doubters need to recognize that the prior bull market ended at the 2016 low and we are at the beginning of a new business cycle and not the end of an aging one. One can simply look at the impressive and broad recovery in earnings growth across all economically sensitive sectors and almost all regions of the globe – it’s the real deal and it’s a great time for you to be a global investor.
Lastly, I would like to point out that although Dow 22,000 sounds high, it is not overpriced relative to earnings. Moreover, foreign markets are even less expensive relative to earnings. As global corporate profits continue to advance, markets will support even higher stock prices and a higher Dow Jones Index than one might imagine. Of course, as markets continue upward the doubters will, over time, become more fully invested – which in turn will drive stock prices higher. Nothing lasts forever, but we would suggest that we are at the early stages of better times to come. The first year of business cycle recoveries typically result in big stock market gains (just like this one) and in subsequent years returns normalize in the 8-12% range, hence the importance of being involved early.
Though I am optimistic, I do expect the normal 8-10% corrections along the way upward. Investors haven’t seen one of those in over a year and should prepare themselves for the likelihood of a return to more normal volatility. Additionally, I want you to know that within my optimistic view, I am very aware that we are dealing with the unknown and that it is a risky world. Therefore, I suggest to continue to employ my Active Risk Management tools such as having a flexible approach to your portfolio’s asset allocation, sector management and the careful placement of stop loss orders on the economically sensitive areas of your stock portfolio. All of which can be found in my book.
I hope you find this update helpful.
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