When it comes to stocks, the general hope is the ones you buy will increase in value so you’ll see a return on your investment. You may pay pennies on a slice of a new company’s stocks only to see that number grow to hundreds, thousands, or sometimes millions of dollars.
That said, there are increasing concerns over whether the days of paying pennies for stocks are behind us. In June, the Federal Reserve discussed the issue of stock prices, openly wondering if they were too high.
Last month’s Federal Open Market Committee meeting minutes were posted online. During the meeting, it was noted that “a few participants expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.”
The trend in skyrocketing stocks began earlier this year, according to the New York Times. During that month, the Dow Jones Industrial Average reached a new milestone. It was in January the average hit 20,000.
The Dow didn’t have long to rest on its laurels. though. Two months later, in March, the average was up to 21,000. While the New York Times’ March 2017 stock assessment did note how there was a slight drop in stock average that same month, stocks continued their roaring success by March’s end and up through the early summer.
This is combined with a lower CBOE Volatility Index, which was at about 11 in early June. For those wondering, it hasn’t dropped to such a point since late 1993.
There’s more impressive numbers rolling in, too. From the beginning of the year until now, there’s been a six-percent uptick in the Standard & Poor index. Research company Bespoke Investment Group notes how this is one of the most successful and longest-lasting bull runs in many decades.
In fact, there hasn’t been a run like this since 1987. That run lasted until March of 2000. The best run before that was way back in 1928.
Not only is this bull market long-lasting, but it’s strong, too. Although not as powerful as June 1949’s bull market or the 1987 bull market, this one has improved by an alarmingly impressive 582 percent.
While this seems like a boon for stock owners in the long-term, investors getting too cocky is quickly becoming part of the problem the Federal Reserve is facing. The central bank has closely followed the stock trends and decided an interest rate spike was in order.
This will essentially make buying stocks more difficult, since getting loaned money will be costlier. That won’t deter all investors, though.
As of now, experts agree the change in interest rates has not impacted stocks—yet. However, it may only be a matter of time before that happens.
What is causing such an increase in stocks – and a positive stock market in general? Many experts point to the start of President Donald Trump’s term in office. The American public, at this point, are optimistic about many of President Trump’s promises, including altering the Affordable Care Act, improving infrastructure and defense, and implementing corporate tax cuts.
Stocks expert and Birinyi Associates president Laszlo Birinyi has been closely studying the stock market for years. As a bull since 2009, he’s pleased with this turn of events – but also cautiously optimistic.
“My attitude is, the market is likely to continue to do better, though I can’t point to historic metrics to prove my case the way I usually can,” Birinyi told the New York Times.
While Birinyi believes “[the stock market] will rise a lot further,” but warns investors against going “all in” on stocks.
“I’d be careful,” he said.
In fact, the stock market could return to normal (or lower than that) sometime in the autumn, some experts predict. During the Federal Open Market Committee meeting, the Federal Reserve noted a yield drop.
“According to some measures, financial conditions had eased even as the Committee reduced policy accommodation and market participants continued to expect further steps to tighten monetary policy,” it was explained during the meeting.
In adjusting that monetary policy, expect a $4.5 trillion balance sheet deduction, the Federal Reserve said. Benchmark interest rates are up, though, which has happened on four other occasions in the past two years.
Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch, shared his predictions on how such a change will affect those with stocks.
“…central banks have exacerbated inequality…it’s no longer politically acceptable to stoke the Wall Street bubble,” he said, adding that the European Central Bank and the Federal Reserve “are now tightening to make Wall Street poorer.”
Harnett predicts that once autumn arrives, stocks markets will have a “big top.”
Regards,
Ethan Warrick
Editor
Wealth Authority
