William Schmick: Big fall after record climb? Signs say not yet
Unless you have been in a coma, most investors are well aware that the Dow Jones Industrial Average reached an all-time high this week. Aside from its headline value, should we attach any importance to this event?
The short answer is yes. Imagine several mountain climbers (let's call them Team Market) approaching the top of a particularly difficult peak. There are higher peaks ahead on this trek but this one is especially gnarly. The oldest and most experienced climber, Dow Jones, achieves the summit. The very fact that someone in the team reached their collective goal gives new heart and strength to everyone in Team Market. That first climber acts like a magnet to the rest but the day's climb won't be over until every climber reaches the top.
The Dow's consecutive record highs are giving other averages the momentum they need to reach their own record highs. The S&P 500 Index is almost there. It is less than 20 points away from its all-time high of 1,565. The NASDAQ, however, is still 40 percent below its record high, which occurred during the dotcom era. I wouldn't hold my breath for that index to achieve a record anytime soon but it will reach a record high for this year.
Some permabears will advise you to ignore the Dow; after all, they point out, that index consists of only 30 large-cap stocks in the industrial sector, hardly representative of the market overall. However, they are ignoring the fact that other averages, such as the Russell 1,000, 2,000 and 3,000, have all hit new highs prior to the Dow's recent achievement. Those averages represent a far greater number of stocks (small, medium and large cap) in dozens of sectors. It was one of the reasons why I have been urging readers to remain invested. Those averages were a pretty good early indicator that the main averages would be going higher.
That said, I know your next question, which is what's next? Like my mountain climbers, expect to base a bit over the next few weeks. We need to catch our breath once the S&P Index hits new highs before continuing our trek higher. Don't sweat the pullbacks we may have along the way. When you climb the heights with Team Market you should expect a stubbed toe or two or even a twisted ankle along the way.
The latest economic and political data seem to bear out my bullish attitude. Unemployment dropped again to 7.7 percent as the economy gained 236,000 jobs, far more than most economists expected. Housing prices are experiencing healthy gains as well, while the nation's industrial base seems to be reviving.
At the same time, our politicians decided to play nice this week. Both parties decided not to contest a continuing resolution and approve a temporary budget that will keep the lights on in Washington. Although the far-right talk shows are ranting about the treasonous actions of some Republicans in voting for a resolution, I see it differently.
After the November elections, I predicted that the icy polarization of our political parties would thaw as the GOP became more willing to compromise. I also hoped that our newly re-elected and lame-duck president would become more pragmatic in dealing with the opposition. In my opinion he has, although his public posture does not indicate that. I have argued over the past four years that when it comes to the economy, Barack Obama leans right of center on issues such as spending and taxes.
I know that flies in the face of what most readers believe but take notice: despite the rhetoric, spending was cut across the board by $89 billion this year ($1.5 trillion over 10 years) and only the very top income earners saw their tax rate increase. In essence, this "tax and spend" president agreed to keep the Bush tax cuts in place for 98 percent of Americans. Yes, everyone saw their payroll taxes increase slightly, but the original cutback in 2011 was intended as a temporary measure in the first place.
This week President Obama had dinner with Senate Republicans to discuss an additional "grand plan" intended to reduce tax loopholes, reduce the deficit and overhaul entitlements spending. I know Republicans who will grudgingly admit that not even Ronald Reagan was willing to tackle those issues.
To me, we are entering a period where fiscal policy will begin to work alongside our successful monetary policy. Globally, central bankers have followed our Federal Reserve's lead with increasing success. There are any number of Cassandras out there who will tell you that this period of market gains and economic stimulus will end badly. They may be right, but in the meantime, I'm determined to make as much money for my readers as possible.
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Schmick's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com
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