Just when you think the market cannot go any higher without a correction, the markets bounced back yet again to record highs this week. While it is true that possibility of tax reform and appointment of a new Fed Chair have buoyed the markets, the underlying economic data has been positive as well sending the market back into a low volatility environment. The number of Americans filing for unemployment benefits fell last week, dropping for a second straight week as labor market conditions tightened further. Interest rates and inflation remain low and despite rising housing prices, home ownership is at a record high.
One would hope that this positiveness will permeate globally. In China, stock market that was held back amid doubts about the government’s ability to maintain economic growth and deal with high debt and excessive leverage began to follow Wall Street higher this week. European stock market, however, is struggling even though the region’s solid economic backdrop and corporate profits call for optimism and more gains before the year end. But uncertainty of the continued leadership of Chancellor Angela Merkel and Theresa May seems to be weighing on the market.
That brings us back to the importance of remaining invested in the market as the historic rally in stocks continues.
Future Wealth’s View
Despite elevated asset prices and low financial volatility, we opine that the absence of a major shock is unlikely to shake the confidence of investors in what has been a very profitable strategy of taking advantage of market dips to add further exposure to the market.
But, buying the dip strategy is based on continued rosy prospects for future economic growth and financial returns. And therein lies the rub. While a simple investing strategy that has proven to be profitable will continue to work as long as the fundamentals remain solid, it could quickly swing the other way if fundamentals do not improve sufficiently and rapidly enough to justify the high valuation in asset prices.
Even though every stock analyst is scrambling to revise his price target upward for the end of the year S&P 500 reading and pretty much every economist who predicted rising bond yields this year has been proven wrong, there is no dearth of outlook reports from many of the same analysts for 2018. Sage words from Benjamin Graham is worth noting at this time – “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”