Why is it that every time our stock markets hit new highs, individual investors start piling on? Not since 2007 have there been net inflows into mutual funds and exchange-traded funds.
People have plowed more than $60 billion back into the stock market this year, so why does confidence soar when the Dow Jones does?
Good question.
In 2009, even I was wary of making large stock purchases; the pain still was fresh from the financial crisis. We saw the government bail out the bad actors in the financial sector while the Federal Reserve started juicing the market with quantitative easing. Job growth was supposed to be a priority, but the actual number of underemployed or unemployed people in this nation has changed little since the crash — if you use the participation rate instead of the artificially manipulated unemployment rate. Many businesses still are not investing for growth, and there have been no real tax incentives for corporations or individuals to repatriate funds and put them to work.
Real estate is back on an unrealistic course due to lack of inventory, and margin debt on the NYSE (the amount borrowed to buy stocks) hit an all-time high in April. Is it just me, or have investors completely abandoned the concept of risk vs. return again?
When the Fed decided to QE into infinity, the real winners were not the average folks, but the super-rich. The wealthy still had plenty of assets when the market bottomed, and advisers were there to help them increase their wealth exponentially, while average Americans were losing their jobs or homes.
Now that our markets are at new highs again, the individual investor is back with a vengeance, but is it too late?
That depends.
When markets run up this quickly, there’s bound to be a correction. Predicting a correction is difficult given that markets can remain exuberant far larger than investors can remain solvent. Corrections are natural and often are needed to prevent asset bubbles. International economies are having a hard time competing with the devaluation of the U.S. dollar, so when our market is hot, not only is “our” money being invested here, but overseas money as well.
The stock market is basic supply and demand. There are only so many shares available of any publicly traded company, so if there are more buyers than sellers, the stock price goes up. Too much money chasing too little return started the last bubble, so take heed. The yield on the 10-year Treasury bond is rising, indicating that the Fed might start scaling back on its bond-purchase program soon.
Is our economy growing enough to offset Fed tapering? I am not sure, but then, no one is. Chairman Ben Bernanke has the unpleasant job of trying to time ending QE before inflation takes over, so expect volatility until there is clear guidance from the Federal Reserve. Be careful and aware of what you are investing in and why. Are you still over-invested in bonds? Are you taking too much risk if you are close to retirement? Are you getting no return from CDs and have to use your principal as income? Are you younger and not putting enough money into your 401K or Roth IRA? All can be serious mistakes with long-term consequences.
Keep in mind that fear has turned back to greed, and this is when the scoundrels hyping some crazy investment returning 20 percent come out of the woodwork, gladly relieving you of all your life savings without any guilt. Ponzi schemes work best in hot markets, and we have a barn-burner right now. The adage “If it sounds too good to be true, it probably is” is accurate, but the allure of fast money never loses its appeal.
Now that things are back to “abnormal,” I want you to profit from knowledge, not fall victim to desire. The pain from the last bubble is still pretty fresh. Invest wisely, please.
Carol Perry is a retired financial adviser and has been a Northern Nevada resident since 1983. She can be reached at Carol_Perry@att.net.