The Stock Train Rolls On...
DOW 20,000 is here! Or at least it was a few days ago. I'm sure you've seen the headlines so it shouldn't come as a surprise that major North American equity markets are at or near all-time highs, including the TSX Composite.
How did this happen? There was Brexit, the Donald Trump surprise victory, rising interest rates, a slow down in the Chinese economy, a collapse in the Euro, plunging oil prices etc. These events were suppose to be catalysts for a sell off yet all of them combined could not prevent stocks from moving higher.
Donald Trump becoming president was suppose to be the most negative event for stocks because of his obvious unpredictability. The exact opposite happened and the 7 year bull market continues to defy “logic” and kick the teeth in of those who try and bet against it.
This is one of the most hated bull markets in history. What I mean by most hated is the lack of participation from investors on all levels but mostly the "Ma and Pa"/retail investors. This lack of participation is reason enough to allow stocks to grind higher and at some point may lead to “panic” buying (Investors who buy on the fear of missing out on the rally).
U.S. - Dow 20,000 – Pessimism Sells... is very good article explaining how pessimism towards equities as well as an extreme low in U.S. adults who hold stocks could be catalysts for higher prices.
Some say we're in a “bubble”, which in most cases means a period of extreme speculation or mania. It sure doesn’t feel that way to me. Bubbles usually have mass participation. What do I mean by mass participation? In 2007 I remember stories on TV about school teachers and “entertainers” in Las Vegas quitting their day/night jobs to flip houses.
In 1999 stay at home moms where becoming tech stock traders. It seemed everyone and their dog was making a killing trading stocks. Take a look at some of the investing/trading book titles between 1999 and 2001 and you'll see what I mean.
We are no doubt in the later innings of this bull market but in my opinion it isn't a bubble. Yet. You'll know when you're in a bubble when you can't escape headlines and stories about small fortunes being made by ordinary people. How many stock tips have you gotten lately from your cousin, uncle, co-worker or taxi driver? Probably not that many.
Having participated in both of these manias the feeling of euphoria was most definitely present. I can’t say the same feeling exists as we continue to make new highs in stocks. I would say its the opposite. People continue to find reasons to not believe in this bull market. The bear case is compelling but the price action is speaking loud and clear.
This doesn’t mean that there won't be set-backs as stocks continue higher. At this point even a garden-variety 10% correction would feel much worse then it actually is. This is because of how slow and steady the march higher has been lulling investors to sleep. Not to mention, the media would make it feel like the world is coming to an end causing panic but also creating opportunities for those who have a plan.
So what does this mean? Uncertainty is always present when investing and nobody can predict the future. However, what is certain is that making investment decisions based on headlines or what you hear on TV will not make you a successful investor.
As investors, we need to have a good long term investment strategy that needs to be adhered to emotions aside. If you don’t have an investment strategy and a financial plan, then you need to create one or hire a trusted professional to help you with the process.