The economy, unlike our political situation, keeps on chugging along, growing at an annual 2% clip. Unemployment at 4.3% is at a 16 year low. The positive stream of earning reports and economic news continues to support the stock market. The 2nd quarter saw US stocks rise by 3% and 8.9% YTD. International stocks did even better, growing at 5.6% over the quarter and 6.3% YTD. Along with rising stock prices this summer, the markets have been eerily quiet. Market Watch reported in July that the S&P 500 Index has gone 272 trading days without a 5% pullback, the longest stretch without such a reversal since 1929! Other measures of stock market volatility also point to a docile market. With the markets steadily rising and fewer ups and downs (just ups!) what is not to like about this environment?
In fact, there are a number of challenges ahead. Yes, the unemployment rate is low but the labor force participation rate is also at record lows, touching rates not seen since the 1970s. Productivity, a key factor behind sustainable economic growth, is low and falling. Health care costs are rising well above the rate of inflation. These factors are putting pressure on business costs and profits. And these underlying factors are before any number of possible external shocks that could affect the economy: failure to lift the government debt ceiling, Korean missile crises, and lack of health care reform, just to name a few bad things that could happen.
So which point of view wins out in forecasting the direction of the economy and stock market, the optimistic or pessimistic view? Given no major external jolt to the economy, the stock market rise could go on for a while. Part of the challenge for investors is that in this low interest rate environment there are very few other productive places to put one’s assets to work. And for the fear mongers among us, who like gold as an alternative investment, please don’t consider! This investment has historically been a terrible bet in the long run.
At our recent client meetings we have heard from a few folks regarding their stock market concerns. We appreciate the temptation “to take money off the table and ride out the storm.” While now might be a good time to reevaluate your risk exposure and your true appetite for risk, the odds have just not been in favor of the investor who tries to time the market. “Staying the course” may sound cliché and boring, but in terms of investment strategy it is the best way to secure higher returns in the long run.