The truth is we know the nation debt is out of control, we know interest rates are unsustainable, and we know politicians in government are steering the long-term direction of the economy in dire straits. But if that was the only thing that drove the markets, investments would never get off the ground.
When it comes to markets, you have many extreme positions and people who claim to have an idea of what is going to happen in the future. The truth is no one knows exactly what is going to happen, and some people just tend to always be a bear and others a perpetual bull.
Most people will agree that over 30 years things will go up, but everyone wants to know what is going to happen in the next year or two. That is the big question because purchasing an asset now and watching it fall 50% is just not a great way to start out the gate, no matter what sort of time frame you are looking at.
Here’s the deal: there are reasons to be bearish and reasons to be bullish. Allow me to address them:
Here is the bearish case:
- Economic growth is weak.
- Economic growth is even weaker overseas.
- The dollar is strong. This hurts international sales and slows the earnings of U.S. multinationals.
- Valuations are high. Since 1929, stocks have sold for an average of 15.5 times trailing earnings for the past 12 months. Today the S&P 500 trades at 18.5 times earnings.
- The bull market is due for a correction. This is the fourth-longest running bull market of the 33 we have had since 1900. Since its March 2009 low, the Dow is up 177%, the fifth-largest gain of any bull market since 1990.
The financial mess in DC could be added to the list here, but I leave it at what I said up top. Here, on the other hand, is the bullish case in a nutshell:
- Yes, the recovery has been weak, but soft economic growth is a fine climate for stocks (witness the outsized returns of the past few years). Perception of a growing economy does a lot for forward momentum in the stock market.
- Slow growth is also keeping interest rates down, making it cheaper for businesses (and Uncle Sam) to borrow and consumers to spend. Easy money is keeping people spending, rather than saving.
- Low interest rates make equities attractive, relative to bonds and cash.
- The strong dollar holds down inflation — the great enemy of both stock and bond investors — and allows U.S. companies to make international acquisitions more cheaply.
- Sharply lower energy prices, a recovering housing market, and improving consumer confidence are also good for the market.
There is validity on both sides, so which group should you believe?
Neither. Trying to time the market is a gambler’s game. The best thing you can do is strategize for the long term and prepare for the worst. And if the worst case scenario does happen, you are prepared and can hold out and allow time to work out your losses.
I love to buy the dips. This doesn’t mean you are going to purchase at the bottom every time, but it guarantees a discount in comparison to a previous high. Having this attitude actually causes me to embrace the volatility and get excited for times of major selloffs and crash-type scenarios. Especially in times like this, I keep some cash on the sidelines and wait for an opportunity to present itself, and I suggest everyone else consider this as well.