Trying to accurately predict the movement of the financial markets is akin to predicting the weather. No one really knows, and we have to wait to see what actually happens.
Traders wore grins and commemorative hats Wednesday as the Dow Jones industrial average broke the 20,000 mark for the first time. The milestone reflects a growing economy. The private sector added 15.6 million jobs over the last 81 months; the Fed has begun increasing interest rates; and average wages grew 2.9 percent in December. It also demonstrates rising expectations, thanks at least in part to perceptions that President Trump’s policies will stimulate growth. However; it is our opinion that it is still to early to really tell how the new administration will affect the economy and by extension the markets.
But what does this landmark mean for everyday investors? Some background information may provide insight. The Dow is widely watched by many Americans because it’s been around for 121 years. However, it is not necessarily a broad measure of market performance because it represents just 30 companies; two-thirds manufacture industrial and consumer goods. The index is also price-weighted, meaning it emphasizes moves by higher priced stocks more than those that are lower priced. Percentage gains in the index affect investor returns more than increases in points, and not all milestones are equal in that respect. For instance, the market climbed 50 percent when the Dow went from 10,000 to 15,000 but 33 percent when it went from 15,000 to 20,000.
Some professional investors are more concerned with the Standard & Poor’s 500 index, which broke its own record on Thursday when it went above 2,300 for the first time. Because the S&P is made up of 500 of the nation’s largest publicly traded companies from 11 wide-ranging sectors, they believe it represents the market better. Neither the Dow nor the S&P 500 track mid- and small-cap companies, which form much of the stock market.
Amid Wall Street’s celebration, economists remain concerned about our nation’s growing debt, which nearly doubled under President Obama and is close to breaking its own record by reaching $20 trillion. Last week, the Congressional Budget Office warned current government spending is on track to bring publicly held debt to $25 trillion by 2027, or 89 percent of GDP. Recent low interest rates kept debt costs down; the Federal Reserve’s plans to raise rates will increase those costs.
Just as it’s important not to panic when stocks fall, it’s important not to get caught up in market euphoria. It should be remembered volatility occurs no matter how high or low an index hits. Patience and a diversified portfolio can help you better manage market fluctuations. It is always best to not react with emotion as it relates to your investments. Investing is a marathon, not a sprint.
For now, enjoy the ride and do not get caught up in the 'financial noise'.
Until next time.....
An investor cannot directly in an index. Past performance does not guarantee future results