Investors have seen unprecedented behavior in stock markets over the past three years, with a massive bull run resulting in two different stock market highs and the Dow Jones getting awfully close to a third top. But the Dow can’t seem to break above the 27,000-point barrier, which indicates that we’re at a market peak. If the Dow hasn’t broken above that level in the past year, it’s not likely that it will ever break through, at least not during this rally.
Both of the previous highs were followed by significant crashes, with the Dow dropping below 24,000 points, having the worst 4th quarter in decades, and ending the year in the red. But that was followed by one of the best 1st quarters in years, with 10-15% growth for most indexes. So where will stock markets go from here?
Most data indicate that retail investors are getting out of stock markets, and have been since last January. While there may have been some short-term profits to be taken for those buying the dip and unloading at the new highs, for most buy and hold investors stock markets have offered no real growth over the past year.
It’s almost universally believed that the only reason stock markets are still elevated is the fact that so many companies are engaged in stock buybacks. With interest rates historically low, companies are issuing debt in order to buy back their stocks. Tax treatment of debt makes it more cost-effective to finance company operations with debt than equity, and reducing the amount of outstanding shares results in higher earnings per share, which leads corporate boards to increase executive compensation and award bonuses.
What those buybacks don’t do is allow stock markets to provide any real information about the health of the economy. If you looked at high-flying stock prices, you’d be tempted to think that the economy is in great shape. But with spotty job growth, abysmal GDP increases, and the prospect of trade wars and higher inflation in the coming years, the outlook is anything but rosy.
Investors who are serious about saving, investing, and living comfortably in retirement would do well to ignore stock markets as a proxy for the economy’s overall health and focus instead on economic data. They would also do well to take whatever profits they have made already and begin diversifying their portfolios if they haven’t already, particularly by investing in gold. With stock markets set to tank in the near future, many investors have already made the leap into gold and will be thanking themselves once the downturn comes.
This article was originally posted on Goldco.
