Hey Millennials, here’s how being too conservative with your money could cost you in the future.
If Wall Street bulls are right, traders on the floor of the New York Stock Exchange will soon be wearing “Dow 23,000” rally caps.
Dow 23,000 — which is just a few points away — would be more than just another impressive number. It would be a fresh reminder that U.S. stocks are at yet another all-time high.
And that approaching milestone poses an age-old dilemma for investors: Is getting into the market at lofty levels a good or bad idea?
So far this year, people who played it safe and viewed any of the Dow Jones industrial average’s 48 record highs as a market top probably regret their decision. They have missed out on big gains.
As of Friday, the Dow has appreciated 15.7% in 2017 to 22,872 — blowing past 20,000, 21,000 and 22,000 along the way. An investor who put $10,000 in a bank savings account at the start of the year instead of investing in the Dow, has missed out on a paper gain of $1,570.
And now that the 121-year-old stock index, which is made up of 30 blue-chip American companies such as Merck, McDonald’s and Microsoft is within striking distance of “23K”, it doesn’t mean it can’t go higher.
The bull call
Some Wall Street pros say hold off on buying a souvenir “Dow 23,000” cap because it likely will be out of style soon and replaced by “Dow 24,000” or “Dow 25,000” hats.
The reason: Dow 24,000 might not be far behind as there’s nothing on the horizon that screams market top or rally killer, bulls say. There’s no irrational exuberance. No runaway inflation. No hint of a coming interest rate spike. And no signs of recession.
And that means — barring some unforeseen shock such as a nuclear war or some other out-of-the blue event that causes a mass exodus from stocks — there are low odds of a stock market meltdown anytime soon.
“Dow 23,000 could spark a market melt-up,” says Ed Yardeni, chief investment strategist at Yardeni Research, referring to a buying frenzy that leads to a steep and rapid rise in stock prices that no one saw coming.
The melt-up could drive investors now on the sidelines to pile back into the stock market at the same time.
“The pain of missing out becomes more intense, as does the pressure to just jump in,” Yardeni adds.
The Dow, Yarendi predicts, could climb to 25,000 by the middle of next year.
Corporate profit growth has been good, he says, with numbers posted in the first half of the year the best since 2011. The market, while pricey based on a historical price-to-earnings basis, isn’t as rich as it appears when low interest rates and tepid inflation are factored in. And major anxieties such as Greece getting “booted out of the eurozone” have faded amid an economic rebound in Europe and most other parts of the world.
“We have spent the past few years coming up with things to worry about that have all turned out to be non-events,” Yardeni says. “Now, the market doesn’t seem to fear turmoil.”.
The Dow has been powered higher this year by global giants, such as Boeing, up nearly 68%; credit-card payment processor Visa, up 39%; heavy equipment-maker Caterpillar, up 41%; McDonald’s, up almost 36%; and Apple, up nearly 36%.
The not-so-bullish call
But not everyone is calling for the Dow to run away to the upside.
“It would be hard for me to get wildly bullish at Dow 23K,” says Bill Hornbarger, chief investment officer at St. Louis-based money-management firm Moneta Group.
This is a time for investor caution not complacency, he says.
Just because stocks overall have been in a relative state of calm and haven’t suffered a drop of 5% or more since June 2016 when markets got spooked by the Brexit vote, that doesn’t mean investors should rule out a sell-off, especially since the market is expensive relative to history.
“This is when investors have to be on guard,” Hornbarger says, noting that stocks tend to produce lower returns when valuations are at lofty starting levels as they are now.
For investors with a cautious streak, Chris Rupkey, chief financial economist at MUFG in New York, offers this advice: “You might want to take some chips off the table. The Dow is up more than 15%, so you might want to consider locking that gain in.”
Others disagree. If the latest 1,000-point milestone occurs, it won’t be a sign of a Dow careening toward a major market wreck, says Jim Paulsen, chief investment strategist at The Leuthold Group, a Minneapolis-based investment firm.
Paulsen is upbeat in large part because the run to new highs has included a wide swath of stocks from many different industry groups, which is a sign of strength.
“It’s not just tech, it’s not just Apple,” he says. Small-company stocks are at record highs, and seven of the market’s 11 main industry groups are up more than 10% this year, including financial stocks, health care shares and utilities, to name a few.
And the continued rise in the market has yet to result in irrational exuberance — or an “all-in mentality” among investors — that often occurs at market tops, Paulsen argues.
“I would be a lot more concerned if there was wild bullishness,” Paulsen says.
What would cause him to turn cautious on stocks? Dow 25,000. That milestone would be a huge headline, he says, one that would likely “impact the mind-set and sentiment” of investors.
If “the culture of the country” took on a much more bullish mind-set, “I would get more conservative,” Paulsen says.
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