As this is written, stocks are rising once again, with the S&P closing above 2000 for the first time in history. Exceeding this artificial benchmark has generated both excitement and trepidation.
The excitement of this 2000 benchmark is purely psychological, due more to our fascination with zeroes than with anything else. A rise from 1900 to 2000 simply indicates that the average has risen another half percent once again - a stellar performance during this bull market of several years, but nothing magical about it.
The trepidation over this level is simply the fear factor. With markets at record highs "there must be a pull back," it is feared. There no doubt will be at some point. But those who got out of the market when the bubble burst several years ago, and didn't get back in, paid a stiff price in terms of foregone gains.
But what if the market does take a severe hit? This is where the difference between long-term investors and short-term traders comes in. The long-term investor saves and invests periodically during all phases of the market. Because during dips, a given amount of money buys more stocks, this investor will own a portion of his portfolio on a low-cost basis, and come out ahead as the market rises over the long term.
In contrast, the short-term trader tries to get out before the market falls and buy in when the market is low. But even the most seasoned professionals can't consistently, if ever, pull this off. Most traders eventually get burned, ending up selling low and buying high instead of vice versa.
The key is the boring "eat your spinach" approach. Live below your means, save early in life, however modest the amount - with emphasis on early - and consistently, letting the force of compound interest do the work for you. Physicist Albert Einstein called "compounding" one of the most powerful forces in the universe. However sensible, such advice to the young usually goes in one ear and out the other.
There are several reasons usually cited for recent performance of the stock market. A major reason is doubtlessly the lack of alternative places to put money. With minuscule bank savings rates and low bond yields, along with loss of capital as bond yields rise, the three to five percent dividends on stocks of major corporations is attractive for funds not immediately needed. With that, there is the added opportunity for capital gains - as well as risk of capital loss, let us not forget. But by holding stocks for the long pull, risk of capital loss is reduced.
A second reason for rising stock prices is that corporate profits remain high, although many of us allege for the wrong reasons. Wages and salaries of all but top corporate executives have remained stagnant for a long time. Higher returns to the working class would increase demand, employment and higher corporate profits. But that's another story.
Perhaps the reason most often cited for rising stock prices is the expansionary monetary policy of the Federal Reserve Bank. This is recently augmented by signals that the European Central Bank, haunted by hyper-inflation of the past, is about to embark on a more expansionary monetary policy.
The market emphasis on monetary policy is illustrated by the close attention paid to remarks by Fed Chair, Janet Yellen, regarding future Fed actions. Any hint of raising short term interest rates sends Wall Street into near panic.
I have long asserted in these columns that Wall Street ought to pay more attention to the state of the economy than to what the Fed might do - this for several reasons:
First, it should by now be evident that, under Yellen's leadership, the Fed is not going to do anything rash, particularly as the economy, read labor market, is not doing well. Sure, it's doing better, but the majority of workers are not doing well.
Second, all know that interest rates will not remain low forever. Talk of interest rates eventually rising should be taken in stride.
Third, as long as rising interest rates accompany an expanding economy, this should be positive instead of negative.
Are we in a "bubble?" Probably not, as price/earnings ratios of stocks are not unreasonably high by historical standards.
That said, financial markets do fluctuate and we can expect periodic declines. But the long run trend is up. For this reason, stock ownership is a rational part of a long-term retirement plan.
Let me present a cynical view here. Eighty-one percent of the nation's stock is owned by the wealthiest ten percent of our people. This small percentage of the nation's wealthy finance the campaigns of our nation's lawmakers - maybe this is realistic and not too cynical. These "bought and paid for" politicians cater to the moneyed interests that finance their campaigns. They will do whatever it takes to ensure that stock prices remain high. That is, the system dictates that capital will be rewarded relative to labor.
This, of course, is with the caveat cited above that Wall Street and corporate America often blindly act against their own interests, engaging in poor risk management, keeping wages too low (thereby reducing aggregate demand) and opposing government expenditures that would benefit the broader economy - education, research, affordable health care, high-speed rail, environmental protection, etc.
Corporate executives and high powered investors tend to be Republican, and vote Republican under the assumption that the capitalist class will be favored. That part is true - capital is favored over labor - but history demonstrates that financial markets do as well or better under Democratic Administrations, as is the case right now.
Nevertheless, many of us still insist that these high corporate profits and high stock prices, however welcome, are for the wrong reasons.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
The excitement of this 2000 benchmark is purely psychological, due more to our fascination with zeroes than with anything else. A rise from 1900 to 2000 simply indicates that the average has risen another half percent once again - a stellar performance during this bull market of several years, but nothing magical about it.
The trepidation over this level is simply the fear factor. With markets at record highs "there must be a pull back," it is feared. There no doubt will be at some point. But those who got out of the market when the bubble burst several years ago, and didn't get back in, paid a stiff price in terms of foregone gains.
But what if the market does take a severe hit? This is where the difference between long-term investors and short-term traders comes in. The long-term investor saves and invests periodically during all phases of the market. Because during dips, a given amount of money buys more stocks, this investor will own a portion of his portfolio on a low-cost basis, and come out ahead as the market rises over the long term.
In contrast, the short-term trader tries to get out before the market falls and buy in when the market is low. But even the most seasoned professionals can't consistently, if ever, pull this off. Most traders eventually get burned, ending up selling low and buying high instead of vice versa.
The key is the boring "eat your spinach" approach. Live below your means, save early in life, however modest the amount - with emphasis on early - and consistently, letting the force of compound interest do the work for you. Physicist Albert Einstein called "compounding" one of the most powerful forces in the universe. However sensible, such advice to the young usually goes in one ear and out the other.
There are several reasons usually cited for recent performance of the stock market. A major reason is doubtlessly the lack of alternative places to put money. With minuscule bank savings rates and low bond yields, along with loss of capital as bond yields rise, the three to five percent dividends on stocks of major corporations is attractive for funds not immediately needed. With that, there is the added opportunity for capital gains - as well as risk of capital loss, let us not forget. But by holding stocks for the long pull, risk of capital loss is reduced.
A second reason for rising stock prices is that corporate profits remain high, although many of us allege for the wrong reasons. Wages and salaries of all but top corporate executives have remained stagnant for a long time. Higher returns to the working class would increase demand, employment and higher corporate profits. But that's another story.
Perhaps the reason most often cited for rising stock prices is the expansionary monetary policy of the Federal Reserve Bank. This is recently augmented by signals that the European Central Bank, haunted by hyper-inflation of the past, is about to embark on a more expansionary monetary policy.
The market emphasis on monetary policy is illustrated by the close attention paid to remarks by Fed Chair, Janet Yellen, regarding future Fed actions. Any hint of raising short term interest rates sends Wall Street into near panic.
I have long asserted in these columns that Wall Street ought to pay more attention to the state of the economy than to what the Fed might do - this for several reasons:
First, it should by now be evident that, under Yellen's leadership, the Fed is not going to do anything rash, particularly as the economy, read labor market, is not doing well. Sure, it's doing better, but the majority of workers are not doing well.
Second, all know that interest rates will not remain low forever. Talk of interest rates eventually rising should be taken in stride.
Third, as long as rising interest rates accompany an expanding economy, this should be positive instead of negative.
Are we in a "bubble?" Probably not, as price/earnings ratios of stocks are not unreasonably high by historical standards.
That said, financial markets do fluctuate and we can expect periodic declines. But the long run trend is up. For this reason, stock ownership is a rational part of a long-term retirement plan.
Let me present a cynical view here. Eighty-one percent of the nation's stock is owned by the wealthiest ten percent of our people. This small percentage of the nation's wealthy finance the campaigns of our nation's lawmakers - maybe this is realistic and not too cynical. These "bought and paid for" politicians cater to the moneyed interests that finance their campaigns. They will do whatever it takes to ensure that stock prices remain high. That is, the system dictates that capital will be rewarded relative to labor.
This, of course, is with the caveat cited above that Wall Street and corporate America often blindly act against their own interests, engaging in poor risk management, keeping wages too low (thereby reducing aggregate demand) and opposing government expenditures that would benefit the broader economy - education, research, affordable health care, high-speed rail, environmental protection, etc.
Corporate executives and high powered investors tend to be Republican, and vote Republican under the assumption that the capitalist class will be favored. That part is true - capital is favored over labor - but history demonstrates that financial markets do as well or better under Democratic Administrations, as is the case right now.
Nevertheless, many of us still insist that these high corporate profits and high stock prices, however welcome, are for the wrong reasons.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
