Market Returns May Not Be as Rosy as the Past Few Years
The stock market continues to surge higher, and there’s a lot of noise implying that this could continue. But how high could the market really go?
If you listen to the mainstream, you will hear a lot about how “this time it’s different,” and just a lot of optimism overall. Don’t be shocked to even hear calls for the S&P 500 breaking well above 3,000 and the Dow Jones Industrial Average surging to 30,000.
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You see, the factors that were driving the stock market higher suggest the returns in the coming few years may not be as they have been over the past few.
Below are five things investors need to keep in mind when trying to predict the direction of the stock market.
1. Interest Rates Are Moving Higher
The Federal Reserve has made it clear that it wants to raise interest rates in the U.S. economy. This shouldn’t be a surprise to anybody. However, bullish investors must understand that if rates go higher, it will create a lot more opportunities in the bonds market.
After the financial crisis, a lot of investors ditched bonds and moved to stocks because bonds didn’t offer higher yields.
Now they could simply dump their stocks and buy bonds—which could have consequences for the stock market.
2. Inflation Is Surging
Low interest rates and money printing were a great setup for higher inflation over the past few years. And now, we are seeing inflation creep up.
In the first seven months of 2018, prices rose 1.3%, marking the fastest price increases in the U.S. in that time frame since 2011. (Source: “CPI-All Urban Consumers (Current Series),” Bureau Of Labor Statistics, last accessed August 29, 2018.)
Inflation is deadly for dividend-paying stocks, which go down in value when inflation is up.
3. The U.S. Economy Could Be Headed Toward a Slowdown
The stock market is a function of the economy. At times, investors ignore this simple face and get complacent, and completely ignoring what’s currently going on.
Look at indicators like the yield curve. There are clear warnings of a recession ahead for the U.S. economy. You can read more here about it here.
If there’s a recession ahead, it would be outright foolish to think the stock market will soar. Stocks move ahead of the economy. They top before the economy enters a recession, sell off during a recession, and bottom just before the recovery.
4. Investors’ Appetite for Stocks
The stock market has had a huge run since 2009, and investors have accumulated a lot of wealth as a result. For example, since the lows in 2009, the S&P 500 has increased by over 320%.
Could investors want to take some profits off the table? It’s possible, and nothing really has to happen aside from a change in their appetite for stocks. This could lead to a massive sell-off.
5. Outside Forces
The U.S. isn’t an isolated nation; it’s impacted by outside forces as well. That means that if something happens in the global economy, the stock market takes a hit.
Right now, even if you assume the U.S. economy is fine, there are a lot of problems in the global economy. China is slowing down, Japan is stagnant, the eurozone is lagging, and emerging markets are facing severe headwinds. All of these things could impact U.S. stocks in a big way.
Stock Market Outlook: 2018 and Beyond
Long-term investors should be careful. I highly suspect that the S&P 500 will increase by another 320% over the next nine years or so without a hitch, like it did the last nine years. Obviously, time will tell.
I don’t think it’s time to go all in when the stock market is at an all-time high. Rather, when that happens, it’s time to preserve wealth.
