DOW 18,000: The Seesaw Stock Market, the Brexit Vote, and More

The Dow reached 18,000 yet again last week on the speculation that the “Brexit” vote would conclude with Britain remaining in the EU. To be successful at investing, one really needs to pay close attention to other factors regarding stocks and bonds. One also needs the ability to understand the difference between real data and “noise”. It is too early to determine what Friday’s votes will mean for the stock market, however as you know from previous research updates, we have been underweight in stocks for over 7 months due to valuations and internal research warnings.

I am a firm believer that Wall Street measures the short term mood of the stock market. All you need to do is watch how news is reported. If the DOW is up 100 points in a day, you read “Brexit will fail, stocks move higher”. Then the next day the DOW drops 600 points, and you read all the reasons which caused the referendum to pass. In today’s millennial language: “Really?” As with all moods, things can change overnight. In January of this year we had panic hit Wall Street, and in April we had extreme Euphoria. Moods affect everything: how we buy, how we work out, what we eat, our relationships, and how we invest. Patience and discipline are very important during these times. However, the facts remain: stock valuations are at historical highs; it is an election year with 2 relatively unpopular candidates; and, we are on year 7 without stocks having a bear market.

From time to time stocks can go through periods of what I call a “Seesaw Market”. In late October of 2014, the DOW reached the 18,000 level for the first time (17,977). That was 20 months ago. As many investors know, interest rates are zero, so if you have a very good bond fund in your portfolio you have earned about 2% over this period (I am using a 5-star Morningstar bond fund for our clients). You may be up in your 401K portfolios, but you are contributing money and most get a match on these investments. If you feel like you are not getting anywhere toward your retirement goals, many are in the same boat. Today the DOW fell below 17,200. The ship is stuck in the harbor…

If you ever sat on a seesaw with a friend when you were a kid and you are like me, you found it okay for a time, but after a while the ride got pretty boring. Then what would go through my mind was, “Ok who is going to be the first one off and make the other person look silly?” I was a pretty nice kid when I was in school, so I was usually the one on the seesaw when my “friend” leapt off and watched me crash to the ground. So in today’s stock market, I don’t think the seesaw will last much longer. A bear is sitting on one side, and a bull is sitting on the other. If the bull jumps off, stocks should be in store for a very nice gain going into year-end; if the bear jumps off, stocks are in store for a very poor year-end. As you know, I have previously alerted that the PE ratios of the stock market are very HIGH. This favors the bear scenario; however, earnings typically are the determining factor, and Wall Street has very high expectations for the next two quarters. The bottom line is that this boring stock market is about to get interesting one way or the other, and our clients are prepared either way.