The Stock Market’s Going to Go Down…Unless it Goes Up

April 19, 2013

A question I get asked a lot lately is what I think the stock market is going to do. We are near (or at, depending on when you read this) all time highs in the stock market. 401k balances are rising. Stock prices have risen pretty quickly. A client company of ours has seen its stock rise from $40 to $56 per share in the last several months. Things look great and when I turn on the financial networks, many of the “experts” are predicting a strong market for the next several years. And, that scares people….

Here are a few things that people have mentioned to me when talking about why the stock market might be in for a correction or a crash. The economy still isn’t firing on all cylinders. Growth is rather anemic. Unemployment is still very high, and while the reported numbers are improving slightly, it’s due more to people giving up and no longer looking for work than it is about new jobs being created.

Company profits are looking good, but it’s not because of top line revenue growth from developing new products and services that customers buy because of excitement. Companies are increasing profits because of cost cutting. That has people uneasy about the future profits because cuts can only go so deep before they impact a company’s ability to function.

On top of those issues, the US national debt continues to rise very quickly and could lead to another debt downgrade, which would hurt the markets. Terrorism is always a threat and could have a significant impact, especially if it were a large scale attack or an attack that coincides with a debt downgrade or a foreign crisis.  A foreign crisis could be looming with the fiscal problems in Greece, Cyprus, Spain, Portugal and other European countries.  It’s conceivable that one of those countries could end up defaulting on their debt, closing their banks, dropping out of the EU and throwing world markets into a tailspin.   There are a lot of “ifs” in all of these. None of the “ifs” are certain to happen so there remains room for optimism.

Optimism comes in the form of “highest & best use” of dollars. In the Federal Reserve’s efforts to help guide the economy, they are engaging in a policy called Quantitative Easing (QE).  In the simplest form, QE involves firing up the printing presses and adding more currency to the economy in an effort to spur the economy forward.

The question then becomes, where are those dollars going?  Well, if you’ve gone into a bank lately you can see that interest rates on cash deposits are very close to zero. I feel like one day we’re going to walk into a bank and see a sign that says “For the low fee of $20, we’ll safely hold your cash for you.”

So, all of the money that the Fed is pumping into the economy is not going into cash.  Bonds? How about them? When the economy improves, interest rates would likely rise as inflation hits the economy and when rates rise, the price of bonds falls. And, with rates as low as they are now, the only real place they have to go is up, so money isn’t flowing into bonds either.

So, if money isn’t flowing into bonds or cash, where does it have left to go? Stocks are a beneficiary of this environment with low rates and the expectation of low rates well into the future. If rates remain low for several years, stocks could be the destination of choice for lots and lots of money, which could bode well for the markets.

So, as you can tell, the case is very clear. The market is going down. Unless it goes up. Or, it could always just stay in one place for a long time and be absolutely flat. Perfectly clear, huh?

What can you do in the face of all this perfect clarity?  The worst thing you can do is take a big bet in either direction and be wrong. That could be financially devastating.  The wise thing to do is to use this as an opportunity to review your portfolio to make sure that it is consistent with your goals, your timelines and your ability to withstand investment risk.

With the market rising, your percentage of stocks may be higher than your goals would suggest is appropriate.  Re-balancing your portfolio can help you prevent one asset class from dominating your portfolio and having undue influence. Consider this market high a gift and use it to review your portfolio, re-allocate your balances if needed, set up a re-balancing program, and don’t try to time the market.

It’s definitely going to go up. And it’s definitely going to go down. What we don’t know is which direction will happen when and how severe the movements will be. In any case, maintaining true to your goals and asset allocation is a way to ride out the inevitable ups and downs of the market.