I’ve created an animated YouTube Video (above), and full-length podcast on this topic.
It took only 7 trading days for the Dow Jones Industrial Average to go from 25000 to 26000 points. This broke the record for fastest 1000 Point gain in the indexes 121 year history. Many investors are exuberant about this change, calling for Dow 27000 and 28000 in the next month, and Dow 30000 soon thereafter.
But is this growth really a good thing?
People fail to notice that we are growing quicker than we have grown before. The only time we’ve seen growth like this was the months leading up to the financial recession of 2008. Consumer Debt is already past 2008 levels, as is the housing market and many other things.
The presidency is cutting taxes as the economy grows, And the FED interest of the rate is still very low, leading to more and more economic growth. On the surface, this sounds great, but if we look a little bit deeper it could be problematic.
It seems that major investors are split between two opinions, one being that this is organic growth, and we won’t see a major correction. The other half is more skeptical, saying that the entire economy is in a bubble that is bound to burst.
I think that Ray Dalio as a very good outlook on the situation. He doesn’t believe the stock market is over-valued as such, but he’s worried that some of the underlying fundamentals fueling the soaring prices could drag down growth in the years to come.
Specifically, he’s concerned about debt. Americans have more debt than assets – and the payments on that debt are growing. In order to keep the cost of debt service affordable, the Federal Reserve will be forced to keep interest rates low, Dalio told The Wall Street Journal.
“It may not be a problem in the next year or two, but the risk of not getting it right increases with time,” he said.
Ed Yardeni, an investment advisor, told his clients in a report on Tuesday that he believes the market is in a “melt-up”, meaning that investors are buying in in fear of losing out, rather than buying on fundamentals. He said that melt ups always lead to melt downs.
And more extreme view comes from Harry Dent. He says that in the next few years we could see a bubble burst that leads to the Dow falling down to 3800 points.
Whatever the case, the Dow 26,000, and soon the Dow Jones 30,000 comes as a blessing and a curse. For almost 10 years, investors have been blessed with a Raging Bull Market, leading to hundreds of percents in returns. But, this rapid market growth could put the stock market in Jeopardy of having a major correction, leading to millions of dollars of operating overnight.
Invest, but be aware.
“Be fearful when others are greedy, be greedy when others are fearful.” – The Oracle Of Omaha