The stock market set several record highs recently, but does the economy support this stock market growth? I’ve been contemplating this question for a couple weeks, and after having several conversations with clients I think I have an answer.
Let’s first start with the numbers and some facts. On Tuesday, May 13, 2014, the S&P 500 briefly rose above the 1900 mark, which is a lifetime high for that index. Contrast that info with the Q1 Gross domestic Product (GDP) growth of just 0.1%. This is down from 2.6% in Q4. Also throw into the equation continued high unemployment numbers, a large debt burden, international instability and political uncertainty. Sounds troubling, huh? But, we’ve heard this song before. This all sounds similar to the talking points discussed in early 2013. Same song…different verse.
Is this the new paradigm in which we are living? One in which market growth doesn’t need to be supported by economic stability. Who knows?
There are many economists out there who opine on the topic, and many I don’t see much differently than those who use diving rods to find water….sometimes they are right( or lucky). But it is not so important whether or not anyone is right or wrong. The importance is how you handle the situation.
My answer is simple: I don’t know if the economy can support the market, and I don’t know if the market needs the economy for support at this point……I just don’t know. Again, who knows?
What to do?
So whether you feel the market is overvalued or undervalued, it simply doesn’t matter. What matters is how you handle your personal portfolio and financial affairs. Trying to guess the market’s next move based on economic forecasting and market valuation can get very dangerous…..essentially, it’s market timing. As you know, I am not a fan of market timing.
Remember the most important measuring stick is net worth growth (which is a holistic or comprehensive measuring stick)….not necessarily portfolio and market growth. To develop wealth it’s important to grow net worth, and to grow net worth it’s important to control the things you can control. Sure, having the appropriate balance in your portfolio is essential, but attempting to juice returns by implementing market timing strategies is dangerous and over the long term doesn’t work.
Control the things you can control. Control spending, savings, and how much you pay in taxes. Couple that with a properly allocated portfolio invested for the long run and you are positioning yourself for success.
We shouldn’t let fear and greed drive our investment decisions. If we back up to early 2013, we can say we heard the same song being played back then. And, if we allowed fear to drive our decisions, we would have missed out of some nice gains.
I have no idea which direction the market will turn….up or down? But, I’m hearing the same tune being played…..simply another verse. Sing along but stick to your plans!