The Page One headline in The Wall Street Journal on Monday morning hummed with profitable promise: "Bull Run in Stocks Widens, Signaling Strength." Deck: "Technical indicators suggest more gains, but some question how smooth they will be."
Note: nobody questions whether there will be gains, and no one worth mentioning is posing the prospect of a stomach-turning market crash. Now, the debate is over the particulars of how the surge in stock prices will play out. What fun!
Here’s a less sanguine view. This latest run-up in stock prices is like ice fishing in northern Minnesota. As winter starts to yield to spring, the 18-inch-thick layer of ice begins to melt away beneath the snowmobiles and tents that have been camped on it for months. The creaks and groans of the thinning ice get louder each day, and more people wonder when the big crack will come and someone falls through.
Same goes for the markets. As stocks reach unheard of highs, investors have to wonder about when the big crack will come. The S&P 500 stock index just surpassed the unprecedented 4,000 level rather handily, the Dow Jones topped 34000 without a blink, and the NASDAQ is rising past 14,000, up 9% in less than three weeks.
Where and when will it end?
This prodigious rise in stock prices flies in the face of abundant reasons for stocks to start going down, a lot. The new Biden administration wants to raise taxes on the “rich” (couples earning $400,000 or more a year), and on companies (which will reduce worker raises), and on dividends, and on investment gains. Brace for more to come.
President Biden aims to devote trillions in new spending in a bow to the Climate Change fear mongers, and he is reining in the U.S. oil and gas industry, the world’s #1 producer. U.S. debt, at $20 trillion just three years ago, now is at $28 trillion, a burdensome 133% of our annual GDP of $21 trillion. Biden wants to borrow a couple trillion more for, ahem, "infrastructure," so we can spend only 5% of it on roads and bridges.
Stock market prices are said to reflect investor expectations of what will happen six to 12 months out. So, why do investors fail to flinch at all of these warning signs?
The answer lies at the Federal Reserve, which vows to keep interest rates at zero well into 2022.
Investor money will have almost nowhere else to go if it wants to grow. Stocks could get a further boost as the U.S. reopens post-Covid, with consumer demand ready to roar.
Yet, at some point, this unrestrained jubilance could instantly plunge into panic selling and an epic market crash. All investors know this well, and as we see the total sums in our 401(k)’s continue to swell, it gets harder and harder to pull back or pull out.
"And that’s exactly when you need to sell," says Ed Butowsky of Chapwood Investments in Plano, Texas. "You are just like any other investor when you get caught up in this phenomenon. Anything that’s positive in the markets has already happened in the markets."
He adds that if a new client suddenly inherited a million dollars and handed it to him to invest, he would put none of it into the likes of Facebook, Amazon, Apple, Netflix, or Tesla, or any other stock right now. Too pricey, he says.
If you are in your 30s or 40s, none of this need worry you; you have decades to make back any losses in a crash. If you are in your 50s, you may want to start gradually trimming the stock holdings in your 401(k) and putting the proceeds into other kinds of assets.
One way to start: sell one-third to one-half of the shares you hold in your best winners.
And if you are past age 60, reduce your exposure to stocks more quickly if they now comprise more than, say, 75% of your total portfolio.
Fifty percent might be a better level of risk.
That advice, of course, is for the fraidy-cats.
This rally could rumble along for another year or two, maybe more, daring us to let it ride.
Dennis Kneale is a writer and media strategist in New York, after six years as anchor at CNBC and Fox Business Network and 25 years at The Wall Street Journal and Forbes. He helped write "The Trump Century: How Our President Changed the Course of History," by Lou Dobbs, published in September 2020 by HarperCollins. Read Dennis Kneale's reports — More Here.
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