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Down Jones Industrial Average just keeps on making record highs. Standing at 21,000, it has made substantial gains lately. According to MarketWatch, it took only 42 days to climb 1,000 points, the fastest-ever such rise after 24 days in 1999 when Dow climbed from 10,000 to 11,000.
Investors are quite optimistic, betting on Donald Trump to fulfill his campaign promises such as deregulation, lower corporate tax rates, and massive spending on infrastructure. NASDAQ and S&P 500 also are up significantly. Now, we’re in a midst of a massive bull run from the lows of 2008/2009 financial crisis.
There are some warning signs, though. Among them are high valuations, rising interest rates, and potential retaliations from abroad if there’s a trade war. Meanwhile, higher dollar made American exports more expensive for foreigners to buy.
Now, markets are expecting interest rate increase at Fed’s March meeting. So far, the Fed has been very benign when it came to rate hikes. As a result, dollar has spiked against major currencies. The index measuring dollar against major currencies is now at the highest since 2002. After hitting lows few years ago, dollar is on the rise.
At this point, some analysts are giving 80% chance that interest rates will be increased this March.
Rising dollar also holds down rises in commodity prices. After expectations of rate hike, gold has declined. Commodities such as gold and oil are inversely correlated to a dollar. If dollar rises, these commodities often fall; and when dollar falls, it usually leads to rises in commodity prices.
Many investors ask whether to stick with index funds, which seek to match the market, or try to beat it with active investment management. As the latest figures indicate, last year S&P 500 Index rose by 9.5 percent.
As Openfolio states, 77% of its users made gains in 2016, and that’s a substantial rise from 2015 when only a third of investors profited from the markets.
According to MarketWatch, investor performance differed rather significantly across regions in the United States. In the West, investors had the worse performance in the nation. In that region, there’s a bias for tech investing. And last year, NASDAQ hasn’t done as well as both S&P 500 and Dow Jones Index did. The average gain in the West was slightly less than 6 percent.
Meanwhile, the best investors were in the Midwest. Here, the average gain stood at around 8.8 percent. A Midwestern bias for manufacturing sector led to these gains.
In the Northeast, the home of Wall Street, investors gained 7.38 percent, while in the South the profits stood at 7.72 percent. For the former, the biggest bets were on financials, and for the latter, on energy sector.
All of these performance figures were below the S&P 500 gains for 2016. This shows that active management doesn’t beat the indices. This is another case for index investing.
What we can learn from it is that average investors should stick with index investing. Another lesson is that sector allocation plays a big role in performance. Finally, investors are biased based on their location. Essentially, they stick to what they know.
The stock market advanced today with the Dow Jones Industrial Index getting within fifty points of 20,000 and reaching a new market high. Since the election on November 8 where Donald Trump was elected as President, the market has rallied over eight percent.
A critical decision by the Federal Reserve is on the calendar for tomorrow but a rate hike is already priced in. The market has indicated that there is a 100% chance for a rate hike tomorrow and it is believed that the Janet Yellen run Fed will increase rates by .25%. However changes in the language released with the rate hike could impact the direction and impact on the market. An increase in the Federal Rate reserve will be the second since the Great Recession of 2008 and will come at a point where the United States economy has improved well beyond other countries and the U.S. Dollar is near all time highs. Despite a rate increase the interest rates are still at comparative lows and by only raising rates once in 2016 the Federal Reserve is well beyond schedule.
Certain American stocks are doing particularly well; Exxon Mobil is advancing on hopes that the new administration with current CEO Rex Tillerson filling the role of Secretary of State will lower the regulatory costs of doing business, while IBM and Apple also advanced greatly. The dollar and bond rates have not moved significantly.
Not only has the market priced in an interest rate increase for tomorrow but there are predictions that additional rate increases are coming in 2017 with two thirds of market observers predicting a rate increase will hit within the first six months of 2017. Markets are often negatively impacted by interest rate hikes as it is believed that stocks are a more attractive increase when rates are low which stimulate growth, though this time the prolonged decade period of low interest rates have left investors in belief that interest rate increases are necessary to decrease the value of the dollar and make U.S. companies more competitive globally.
Other trends are also impacting stocks such as a bounce back of oil prices and stock increases in Europe and around the rest of the world. European stocks are largely influenced by stimulus programs in those countries which are now being dialed back in the US.
When the first serious thoughts of an impending Donald Trump presidential election victory may actually come to pass, U.S. stock market futures tumbled.
However, the day after the election, the stock market actually surged upward as financial analysts weighed the possibilities of Trump’s economic proposal on spending to improve U.S. infrastructure. At the same time, the controversial candidate struck a far more benign tone during his celebratory speech compared to his fiery rhetoric on the campaign trail.
Wednesday’s surge was fueled by the banking sector in anticipation of a Trump fiscal policy which would cut back in the restrictive regulation that hit the industry following 2008’s financial fallout.
However, the rise in stocks didn’t end there and continued through the end of the week. By Friday, the market actually enjoyed its best week in five years.
In addition to banking, other financial sectors which saw a rise were commodities, industrials, materials, and pharmaceuticals. Conversely, drug insurers saw their prices tumble. The latter two are a result of Trump likely going after ObamaCare. Also, Hillary Clinton likely would have tried to regulation the drug industry more. Instead, pharmaceuticals and biotech firms may not face such restrictions under a Trump presidency.
The rise in stocks may also be due to oil prices likely remaining low in the near future due to a surplus on the market. In turn, low oil prices may allow consumers to go out and spend more right in time for the upcoming holiday season.
A Trump presidency also may dissuade the Federal Reserve from raising interest rates next month. Trump has been critical of the Fed in the past and that may cause more caution from the Reserve. The continuing low interest rates may serve as a boon to foreign stock markets as well.
Many foreign markets initially tumbled as a Trump presidency becomes increasingly likely. However, his conciliatory tone during his victory speech temporarily calmed such nerves. In fact, many foreign stock exchanges closed on Friday with higher numbers compared to a week ago.
While many still see the months ahead as uncertain, there wasn’t a plunge in stock prices as many had speculated and feared. All that means is the market remains uncertain for the coming months ahead.
The stock market has not known how to respond to a Donald Trump Presidency and has therefore been volatile ever since he was elected on Tuesday.
The volatility began before he was elected; when signs were present that his side was strengthening the stock market dropped and when Clinton seemed stronger the market bounced back. When he won the key mid western states the stock market crashed but recovered the next day.
Now the stock market is accelerating with movements that have pushed it to its best level ever and is coming off of its best week since 2011. While there are many doubts as to the impact that his presidency will have on stocks, people are taking in the good and reducing the chances for the bad.
The good for stocks are proposed tax cuts to corporations which will reduce the tax burden. Trump is proposing dropping the corporate tax rate to 15% from 35% which will lower the tax burden on companies and increase their net incomes. Further, President a Trump is proposing a one time foreign profit repatriation at a ten percent tax rate. Companies like Apple have significant amounts of money overseas that they have as yet been hesitant to repatriate due to a 35% tax rate when they do. These moves would move the United States corporate tax rate from the highest to the lowest in the developed world and is seen as a positive for stocks. Further cuts for individual tax rates is thought to further demand growth.
The negative would be the impact of trade wars on the United States if protective tariffs were implemented by Trump, which he repeatedly promised during his election campaign trail. These promises would provide for a risk of higher prices for consumers and would risk the United States economy spiraling downward.
For now, however, the stock market has taken the news of a Trump presidency remarkably well and has led to the aforementioned gains. Of course, Trump has not been sworn into the Presidency yet and the actual policies that he will implement have not been fully fleshed out or understood by the stock market. What the long term impact of Donald Trump’s policies will be for stocks will not be fully understood for years to come.
There has been a lot of speculation as to what effect the upcoming election will have on the stock market. With the democratic candidate expanding her lead, it was thought that might be what has driven a recent increase in the market’s overall value. However, a story on CNN Money says oil prices are the biggest change factor and that is what is driving the American stock market, even more than the election could.
The story noted that the Fed may raise interest rates later this year, and that usually does have a small impact on the market. Other banks may remain as they are, and that is not expected to cause much change because it is well known beforehand.
The story says a move up in oil prices recently has given energy stocks a boost. Falling oil prices over the past couple of years have hurt major oil company’s stock values, and the rising prices may help them rebound.
OPEC nations have agreed to freeze production, or at least to not increase it, and that has led to an uptick in crude oil prices, which is a great relief to the oil companies. The rise in oil prices will also help infrastructure type companies, as well as the industrial sector, show more earnings.
Oil remains at more than $50 per barrel, and that is important from a psychological aspect, finance officials say.
But on Tuesday, Saudi Arabia said it hopes to actually cut back on production, and believes it may be able to convince other OPEC nations to do the same.
Other investors are pleased to see prices rise some, but they are not confident it will remain steady. There has been a lot of rising and falling oil prices, which adds instability to to the market, finance officials say.
Other financial experts believe prices are at a good level now. Prices are high enough to give energy companies their profits they need, and still low enough for consumers of gasoline to not feel the pinch of high gas prices.
Finding that sweet spot might help both the oil companies and the consumer, and that may not make the stock market rise sharply, but it would give it some stability regardless of what else happens.
The stock market is having a melt up. It’s strange to see the dollar, gold, and the stock market so strong at the same time. The old economic theories may be thrown to the curb for a variety of reasons. One reason is investors are moving away from defensive stocks like telecoms and industrials and moving into retail, IT, and consumer goods. Investors have an appetite for risk right now, and that is driving to stocks up even though there is an economic crisis brewing in many parts of the world. The rush to buy cyclical stocks is driven by the fear of missing out on a good investment. It’s not a sign of a healthy economy. No one is sure when this stock melt-up will end, but the Feds might shed some light on that at the end of August, according to an article published by businessinsider.com.
All the signs that a recession is coming are visible these days. Corporate earnings are down. Consumer brick and mortar spending is soft, but it’s good for online retailers. High-end retailers are having a difficult time, and the discount chains are stepping on each other feet with crazy promotions. The European Union is in trouble, and the UK is trying to figure out where they go from here, economically speaking. Several European banks are in trouble, and the migration crisis and terrorism are changing the fundamental reason the EU was formed in the first place. The euro can’t seem to appreciate, and the dollar stays strong in spite of the fact that there’s no real reason for it to stay strong other than low-interest rates.
But the biggest fly in the economic and financial ointment right now is China. China can’t get its economy moving again. The Chinese have poured billions of dollars into roads, new construction, retail shopping centers, and real estate, but the government can’t seem to replace their old economic model which was being the factory that makes cheap products for the world. China’s banks have way too much bad debt on their books, and the government will be forced to use capital reserves to rescue their banking system sooner than later. China may not seem like the straw that will break the back of the U.S. economy, but it is.
Donald Trump isn’t only a presidential candidate. He’s a multi-billionaire real estate investor. But, he’s not considered to be a stock market guru, unlike his political and business critic Warren Buffet. What Buffet advised is not to listen to Trump- whatever he says.
Buffet is recognized as one of the best investors ever. And he said that throwing darts at stock pages would result in better returns than listening to Trump.
Still, Trump has some advice to stock market investors: Stay away. So far, he has warned investors of some very scary scenarios. So, it’s better to dump stocks, he thinks. “The only reason the stock market is where it is, is because you get free money,” said Trump.
In the past, the presidential candidate has criticized the Federal Reserve Bank for keeping interest rates too low. According to “CNN Money,” Trump has less than 10% of its net worth in the stock market.
So, to whom should investors listen? For real estate investing, they may listen to Donald Trump. After all, that’s his area of expertise. For stock market advice, it may be better to listen to Warren Buffet.
However, investors need to take into consideration that Buffet is a long-term investor. Also, the stock market valuations are high at present, while there’s economic uncertainty. And that goes against the advice to buy low and sell high.
Many finance experts and academic research reports claim that share buybacks are a great way to raise shareholder value. After all, these buybacks reduce the number of outstanding shares, thus leading to higher earnings per share. However, a recent Goldman Sachs analysis revealed that stocks with the highest buyback yields (based on four-quarter yields) have underperformed the S&P 500 Index. What makes it even worse is that some companies acquired debt to finance these share repurchases.
The reason for this underperformance, claims “MarketWatch,” is that during periods of slow growth these companies don’t provide their shareholders with consistent dividend yields or prospects for future growth.
Based on recent data, investors are rewarding companies that offer high dividends for shareholders and/or high capital expenditures to stimulate future growth. Meanwhile, buybacks are no longer rewarded as much. In fact, they seem to be penalized by investors.
“Weakening balance sheets and rising interest rates also imply that the ability of firms to repurchase shares by issuing additional debt will diminish,” claims Goldman Sachs report.
This is, indeed, an interesting study, which also puts into question the old wisdom that share repurchases are good for shareholders. Many companies may begin to question buybacks. It is estimated that there are $150 billion outstanding in authorized buybacks which weren’t executed yet.
Share repurchases can be beneficial if the company has plenty of cash and not many good opportunities to pursue, especially in a market with high valuations. But, acquiring debt to buy back shares from investors can backfire in higher interest costs and reduced earnings, and all on top of increased risks.
Great Britain recently made the news when the people there voted to leave the European Union. This is a major financial event that will have an impact throughout the world. Many people in the United States are unsure of how this decision will affect their portfolio. After the news was announced, the stock market lost three percent in a single day. If you are an investor, it is vital to be informed about events happening around the world. There are companies that you can buy at a discount after this latest news.
Investing is a great way to build wealth over time. The stock market is going to be volatile over the next couple of months as people try and determine the total cost of the recent news out of Great Britain. As an investor, it is important to remain patient with the stock market. Far too many people try to jump in and out of the market to earn a better return. Studies show that long term investors have higher returns than day traders. When investing, it is important to stay calm and to think about the long term gains that are possible.
There is a lot of anxiety about the recent vote in Great Britain as it relates to the world markets. Instead of worrying, it is important for investors to buy into companies when the stock market drops. This is a great way to get quality stocks at a discount.