Market at Record High: 5 Theories

How about the recent article I read in The Wall Street Journal titled, “Why Do U.S. Stocks Keep Hitting Records? Here Are Five Theories.”* There are at least five reasons for the recent (mostly) strength in U.S. — and global — stocks. Based on historical returns, a nod toward cautious optimism is always healthy as well.  For my long-time readers, this means I will also reference “The Greatest Chart Ever”! Read on…


As for the “Five Theories” (in the opinions of the WSJ article’s authors),

1. Stocks reflect the resurgent health of American corporations.

Strong profit growth has been reported in companies ranging from oil to technology to economically sensitive construction- and building-related.

2. The Global outlook is looking brighter.

Note the research says the global outlook.

3. The U.S. economy is in a Goldilocks situation.

“Goldilocks” here is an economic term for a period of steady growth — but not super-hot growth requiring the Federal Reserve to raise interest rates to cool things down. And unemployment is encouragingly low.

4. Passive funds are propping up prices.

Stock-picking as an overall strategy of managing one’s retirement monies has given way massively to favor broad, lower cost, index-based investing.  Please ask me more about this.

5. There is no alternative.

Currently, bond yields have stayed stubbornly low, and stocks offer much greater returns.  Over the long-term, this conclusion is even more evident.

As for my cautious optimism in relation to these five theories:

You may recall one or two of my past articles referring to “The Greatest Chart Ever”.  In summary, this annual data** (dating back to 1980 in the S&P 500) points to an average intra-year decline — every year — of 14%.  This means that on average sometime within every year since 1980, from the high of the year to the low of the year, the S&P 500 is down on average 14%.  And within three-year time horizons the average decline is even higher.  BUT — even amidst those average intra-year declines in the S&P 500, the average annual return by year-end is +13% — and has been positive in 27 out of the 35 years of data.

How is it possible to maintain steadfast in this type of volatility?

Professional advice — an objective voice — is key.  A real adviser will produce discipline and portfolio diversification for the client.  The resulting knowledge can prevent emotions like fear from interfering with an otherwise well-formulated plan.  I am dedicated to spreading this knowledge.

*Source: WSJ, Akane Otani and Chris Dieterich.  Please email me or click here to read the full article.  

** Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management, Morningstar. Based on price and dividends.

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