The Dow Hits All Time Highs – What This Means and Beware The Risks

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The market continued on its rampage reaching an all-time high, surpassing levels last seen before the 2008 financial crisis. This is despite Congress and the Obama administration squabbling about the impacts of sequestration and who would be blamed for a potential economic calamity due to the inefficiency of Washington. Looks like tax cuts (rises for some) and government spending cuts are not that big a deal after all.

Dow High

While the headlines out today may sound ultra-bullish on the stock markets, sentiment can change in an instant and the same pundits calling for higher highs may abruptly change tune telling investors to suddenly sell. Very confusing for the average retail investor, but here’s my take (in plain English) on what all this means now and in the near term

The fact that the stock market continues to reach new highs despite no new or significant news, a bumbling Congress still getting over their failure to avoid sequestration and company earnings that are more or less in line with expectations, suggests that caution should be paid to the recent rally. This all means that market forces which are primarily driving the current bull-run, could change abruptly following an unexpected event (e.g. geopolitical or policy driven). So continue to invest for the long term via your 401k/IRA accounts, but be very cautious about investing in the market now. If you are a trader though now may be good time to be taking some ultra-short positions to benefit or protect yourself when (and it will happen) the market turns negative.

The government and Obama administration theatrics and threats are being completely discounted and starting to becoming irrelevant. With four years of ideological differences, Obama/Democrats and Republicans are more far apart than ever. Even with higher taxes enacted through the recent American recovery act and sequestration measures being passed, no real compromise on economic policy for the nation’s future has been reached. But it looks like the market and most of us have now tuned out to the political rhetoric of Washington DC because they cannot seem to get anything significant done.  In fact it would create more shocks if they actually agreed to do something. For example tax reform, depending on how it is structured, could provide a significant catalyst to continue the stock market boom or bring it to an abrupt halt.

The run in equity markets and rising home prices has favored the well-off more than the less fortunate which continues to exacerbate income inequality in America. This is because those with the cash, the rich or well-off, were able to ride out the recession and take more advantage of historically low assets and equity prices over the last few years. There is a reason why the recent Forbes billionaire list shows the same billionaires getting richer and richer.

The cost of living in America is going up, hitting more people much harder than the benefit they see from rising home prices and improvements in their investment/retirement accounts. This means continuing to live within their means, but taking advantage of the improving fortunes of corporate America and an improving employment situation. For example, I know a number of people who haven’t had a pay raise in 3-4 years, but received or were able to negotiate a 3 to 5% raise this year.

Bottom line is caution. While it is great to look at your investment accounts, see your home price estimate rising on Zillow and a more optimistic employer/employment picture you need to remember that 2008 is not that far in the rear view mirror. Good saving and investing habits are key and being cognizant of your financial risks is more important than ever.

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{ 6 comments… read them below or add one }

gail March 11, 2013 at 11:07 am

The Dow reaches a meaningless milestone that’s divorced from fundamental economic strength, the Fed’s money-printing continues to force investors into risk assets. All the signs for an impending crash.

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Aram Durphy March 8, 2013 at 11:23 am

I caution against trading on short term expectations. The one constant in the stock market is that short-term market movement is completely unpredictable. While I do think a correction is probable, the size and duration of such a correction is impossible to predict. If a trader is short now, and the correction is shallow, that could kill his overall return. A focus on the long-term, with dollar cost averaging, is the surest way to long-term profit.

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Andy (Author) March 7, 2013 at 10:10 am

I think sitting in all cash is not a great idea. Invest via your 401K/IRA for the long term. But short term, traders rather than investors will see the most benefit.

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Donald March 7, 2013 at 8:13 am

So taxes are up slightly for the wealthy, and yet the stock market continues to rise. I was told that the wealthy would flee the country and stop investing if taxes were raised by a penny. Maybe the boom in the market is entirely due to increased gun sales…

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Andy (Author) March 7, 2013 at 10:09 am

The rich get richer and the poorer stay poor. That sadly is the general trend in most recessions. The only silver lining is that during the ensuing boom, more people have the opportunity to shift up socio-economic classes thanks to more jobs and higher pay.

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Martin March 6, 2013 at 8:34 pm

I laughed at the Obama’s threat of Washington inefficiency. Heck they are already as inefficient as never before! The next level is only to close it down and go out of business.

I agree that caution is the right play today. I am not investing and sitting in cash (I still hold my long term holdings, but do not invest new money at all) and waiting for a pullback. You would hear the noise when it all crashes again (not saying a disaster, but a big bang for sure when we correct back to some sustainable levels). And that will be my time to start buying again!

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