“What’s going on with the stock market? Why is it setting record all-time highs? Is it about to implode? What am I not getting?”
These are the types of questions that I am regularly fielding from clients, friends and family these days. In a world that, in many ways, feels so uncertain — divided, with no shortage of security and social concerns and threats — why is Wall Street seemingly so upbeat? Is it what former Federal Reserve Chair Alan Greenspan — in another robust market era back in 1996 — coined, “irrational exuberance”?
Predicting markets, like predicting the future, in general, is a very tough game that will much more often produce poor results than good ones. However, it helps to discuss what we and the world know, and give our perspective on the market’s connection to and reflection of those facts. In other words, does information like economic data and corporate results seem to be well-reflected in market prices, or is there some big disconnect going on?
A quick review of what’s been going on in the economy and in business shows, on balance, pretty encouraging news. The U.S. economy grew at roughly 3% in the second and third quarters, and economies around the world are growing.1 There is no significant economy across the globe that is in recession. Unemployment, at 4.1%, is at the lowest level since December 2000;2 manufacturing and services data have shown robust expansion for the past several months; and consumer confidence is also at its highest level since December 2000.3 U.S. corporate earnings have grown at an average of 9.5% over the past four quarters versus the prior year, and interest rates, which are used to value earnings growth, have remained low and stable.4
Markets in the U.S. and around the world have both anticipated and responded to these results accordingly. Would it have been more rational for markets to have reacted negatively? Meanwhile, not all sectors and companies are doing well. Retail, for example, is struggling with online competition, and traditional blue-chip companies, like GE, IBM and AT&T, are challenged to transform themselves as technology and competition disrupt their traditional businesses. The shares of those firms are suffering this year, given their weaker results.
So, there is a grounding — a basis, a rationale — for this year’s stock market strength. Economies are growing, and business conditions are good. The shares of companies that are performing well are being rewarded, but those that disappoint are not. As of November 3, the global stock market index is up over 19% for 2017.5 It that too much or too little? That is the argument that traders and investors fight over every day from 9:30 am to 4:00 pm Eastern Time. We know economic and business performance is cyclical. At some point, overspending by consumers and overinvestment by businesses may lead to an ultimate slowdown and excesses will get corrected, just as they have over the many cycles over the past many decades.
Could a slowdown come sooner? Sure. Could it come later? Sure. Again, the prediction business is a terribly tough one to be consistently good at, so let others in the investment and financial-media worlds do their forecasting and wish them well. Instead, continue to stick to your principles and your plan — diversification globally across stock and bond markets; disciplined rebalancing; and use of simple, transparent, tax-efficient and low-cost investment vehicles.
Good years are fun; bad years, not so much. But together, we’ll keep our focus on doing the right thing and working toward the goals that will take many years to achieve — and we’ll hopefully wind up 2017 as a solid plus on the long road toward reaching financial success for us all.