The first two months of 2013 have seen the bull market in full swing. Day after day there have been outstanding gains in the market and it appears that there is a significant amount of ?money flowing into equities. While driving down to Florida last Friday I listened to some of the financial channels and all they could talk about was the influx of money entering the equities market. I’m not complaining, not by a long shot, I love my gains as much as anyone else! But I have to wonder how many investors are pouring money into a market that may have reached or is approaching a peak? If any of us are buying into this up market are we running with the bulls or running with the Lemmings towards the cliff edge?
There was a recent article in ?The First Million is The Hardest? Investing Experts Herd Mentality on the herd mentality that is worth reading if you haven?t already. The article focuses on the herd mentality and how investors are pouring money into this bull market and questions the wisdom of all that money pouring into a market with ?record five year highs?. I have to agree with the author 100%. I can’t help but think that the “herd mentality” is doing more to keep the market up then any sound economic news.
Here are some of the things that concern me with this run on the market:
Payroll Tax Hike – Yes, I know, technically it wasn?t a tax hike, it was a tax holiday. But once someone gets used to seeing that extra money for two years, they come to count on it. When it disappears from their paycheck, something is going to give. More likely than not the hole is going to be filled from discretionary spending. Quite simply, the average consumer is probably going to spend less now than they did in December.
Gas Prices – The average national gas price is $3.81 as of Feb 18 2013, that?s a 44 cents increase as compared to the average national price of gas on Jan 7th. (?U.S. Energy Information Administration).?Families and individuals are going to drive less and many of the economic “experts” are predicting that this will equate into less retail spending (I’m not too sure about that, I just don’t see the average American family huddling around a candle wishing they could go to the mall). But, this sudden surge in the price of gas will certainly have an impact on an already shaky economic recovery
Health Care – As Obama care phases in, small businesses are going to suffer. The cost to small business is going to be significant enough that many small businesses will be making some hard decisions. Reducing their work force or not hiring additional manpower is probably one of the first steps they’ll take. I’ve already heard several radio experts discuss how small companies are in the process of throwing in the towel, approaching large companies that they have ignored in the past and asking if there was still a deal possible to get bought out.
Gold, Gold is bouncing around and close to a 3 year low. This has been widely attributed to investors pulling their money out of gold and putting it into equities. I’m no expert, but when investors are abandoning the steadfast ?gold? to jump into equities, I look at that as classic “herd mentality”.
I’m not a pessimist by any means and I don’t want to be seen as the ‘Chicken Little” of the PF community, But, I?ve been burned too many times in the past too not be wary when the equities markets charge upwards like they?ve been in the last month or so. One of my key portfolios has done extremely well, and I’m glad that it has! But I’m taking the steps necessary to protect the gains I’m seeing in there. I’ve pulled some money off the table, selling and recouping the original investment from some securities that have done extremely well.. I’ve been putting trailing stop losses on some other equities in my portfolio. I?m making sure that I have some protection built into my portfolio to retain some of the gains should the bull market retreat and the lemmings start falling off the cliff.
A quick afterword. I drafted this post with the intention of finishing it and posting it this weekend or early next week. I?ve accelerated this as I think the market performance of yesterday and today warrant that I post this sooner than later. The DJIA lost 108.31 points yesterday (2/20) and finished today 46.92 points lower (2/21). Are we seeing the beginning of a correction? I don?t know and the reality is that no one can accurately predict whether we are seeing the start of a correction or not. It?s possible that this can turn around and blow past all records in a day or two or that it is in fact a correction and we?ll see further declines. The thing to remember is that all Bull Markets will eventually have a correction. Your investment behavior during the Bull and during the correction shouldn?t change because of what the market is doing. Follow your strategies and make sure that part of your strategy is protecting your gains and taking advantage of price drops.
Tell us if you’ve been taking steps to protect your portfolios. Have you taken anything off the table? Are you using stop losses? Have you done anything else to protect your investments?
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Personally I think there’s been way too much printed money thrown into all markets through quantitative easing. If it doesn’t have a permanent positive effect on the economy then sooner or later that bubble will burst as there’s only so much money you can print before it starts to cause other problems, that’s just how I see it anyway.
I agree, that’s the biggest problem with a fiat currency, you can have as much money as your printing presses can push out the door! That bubble has to collapse sooner or later, it’s also why we can expect massive inflation and devaluation of the dollar since our pritning presses are busily at work!
Thanks for the shout out!
I’m not too worried about the current state of the market. There may be a correction here and there due to different political factors, but I think the market should remain strong over the next few years.
With my portfolio I’m taking a cautious approach, I’ll be a buyer when the market dips but I’m not going to get carried away buying or selling unless something very significant changes my overall outlook.
No problem, That post hit home since I was thinking along the same lines when you wrote it. I agree with you, I’m not so much worried about the big run up on the market as I am about folks feeding the frenzy for no reason other than everyone else is feeding it as well. I’ll stick to my strategy. part of that being protecting some gains and making sure I have money on the sidelines to take advantage of the dips.
Don’t get me wrong, I’m long on America and short on a lot of less-fundamentally-strong countries, e.g. Canada (which has a huge housing bubble that is only starting to deflate). But yeah, I absolutely agree re: weariness about any huge, temporary price swings. Steady, reliable trickles of profits and dividends are one thing, big price run ups are another especially when they start becoming front-page news.
My warnings flags go up when we have big run ups like this. There’s bound to be a correction. the key thing is to stick to your strategy and cover your gains (that’s part of my strategy too)!
Oh, I forgot to mention, I have a decent bit invested in FICDX, Fidelity’s Canada fund. I’m comfortable with it’s performance to date. Do you have any opinions (All disclaimers understood, lol).
lol yes, disclaimer: I don’t give investment advice.
Canada’s markets are incredibly resource-heavy with particularly heavy weighting in oil. There are significant problems coming down the pipeline (pun intended) where America is finding cheaper oil elsewhere (particularly because it has massive reserves domestically that just haven’t been tapped because of enviro laws) and the cost of extracting and refining oil in Alberta is growing. These market shudders have already been reflected in a huge budget deficit for the province due to unexpected, massive drops in oil royalties (which make up over a quarter of provincial revenues).
We have an oligopolist banking sector with 5 mammoth banks that control almost the entire market. I am long BMO because I worked for them at one point; I bought at like $40-something a share and they are a dividend machine. There is a massive housing bubble in Canada. It won’t hurt our banks like in the US because of their size and the CMHC (where taxpayers guarantee against loses). So John Q. Public will lose money but banks will merely experience flat-lining of revenues rather than collapsing. They’ll shed tons of jobs, our overall economy will take a hit, but the dividends will flow (albeit at a stagnant rate). Because of their high prices, I wouldn’t buy in now but again I am long on Canadian banking.
I’d buy Canadian bank stocks or a specific bank fund, when valuations are more affordable and that’s about it. Then I’d focus on US energy companies because profit is profit, whether it’s in Canuckistan or America and what matters is tax efficiency (so, for me, I’d buy Canadian unless it was in my RRSP, so as to enjoy the extremely low tax rate from the dividend tax credit).
Joe Thanks for the insight! I need to look at BMO, only because lately I’ve taken a greater interest in dividend stocks (versus value and growth, which has been my mainstay forever). Energy companies are interesting, I’m in BP and have been since the gulf oil spill, only because they were severely undervalued after John Q Public dumped them. Thanks for the well thought out comment!
I keep hearing that most well run businesses are still undervalued. I’m not sure what to think. I’m happy that my only investments at the moment are in a 401(k). I’m in it for another 29 years or so, that’s when I can withdraw without the penalties. So for now I’m not too terribly worried.
Actually, when I analyze a potential company, and I do that several times a month, I’m still finding that there are good values available. I’m not terribly worried myself. The biggest point I really wanted to make is that in this market I’ll buy with caution (if I buy at all) and that I have taken steps to protect my gains. 29 years is a way off so you have a lot more room than I do, I can start withdrawing in 7 years but don’t want too, I’d rather keep working and let the retirement funds grow as much as possible before I begin to tap them.
I’m a pretty novice investor, to be honest. I try to pick sensible companies or funds and my portfolio is not super aggressive in one direction or another. I also don’t own a lot of individual stocks, so no, I haven’t taken any precautions like you have.
I have both funds and individual stocks. The stocks are the ones that I have taken precautions on. the funds I pretty much leave alone and let the fund managers do what they do best, and hopefully they are good at what they do!
I’m leading the lemmings off the cliff (didn’t see it as an option!). Last second I’m going to pivot.
“Yes, I know, technically it wasn?t a tax hike” – I like to look at all tax changes as permanent… so if one of these California income tax laws finally sunsets (won’t happen, haha) it’ll be a tax cut. Same thing with the so-called Bush Rates versus the Clinton capital gains rates – 15% -> mid 23 max is a hike, and 35 -> 39.6 (or even ~42/43 depending on health changes) is a hike to me, even though the taxes were ‘temporary’ for 10 years plus a two year extension.
Our entire tax structure is a disaster. Amazing how a minor change to a temporary “break” or “hike has the potential to have a significant impact on our economy. You have to wonder how are Government managed to get by before there was a personal income tax. Mmmm, maybe they had their spending under control?
How do you feel about housing? Is it headed up for the next few years or heading towards another bubble? Here in Southern California, prices have jumped and inventory is very low. Herd mentality is in full force with 5-10 offers on every decent listing. I thought I was ready to buy, but now I feel not ready at all as I feel priced out compared with where prices were 6 months ago!
I won’t even begin to hazard a guess on housing. I called the bubble burst before it happened but that was just plain logic, when couples are spending 5 to 10 times their annual income on a house then there’s something wrong with the market and a correction is bound to happen! The Cali housing market scares and puzzles me at the same time. I’m surprised that the activity is so hot there, prices in Cali were so far above what I consider norm that even after the bubble burst, the prices were still significantly higher than the rest of the country. Call me chicken but I’m afraid I’m going to have to take a pass on this one 🙂
Jose,
Totally agree with you “herd” mentality, our whole society is built on a herd mentality. Many are so fixated on what the media and politicians “give” us, we have no desire to think for ourselves. We are a nation of sheeple!! Great Post!
I find it fascinating and revolting that the American public “eats” what the politicians and especially the “biased” media like babies being spoon fed mush. It’s one reason I dislike listening to “Financial News”. Even after a half hour I’ll have a stock in my head that I feel I need to look at because they blah blahed about it endlessly. Sheeple is a great term to describe this phenomena! I can only hope that enough people wake up and take control of our destiny.
You make a good point about health care. I know many doctors, self included, who are trying to sell their practices or have them taken over by larger health companies or hospitals. While that is not my reason for selling, it does cost a huge amount of money to become compliant with all the health care rules for providers.
Most of my investments are in tax deferred accounts, and we plan to rely mostly on rental income to fund us if we want to quit working before 59.5, so I’m not terribly concerned right now with what the market does. It always does amaze me how many people buy high and sell low.
The medical providers are getting regulated into the ground. first it was Hippa, and now we have the mandate to move to Electronic Health records. My wife works in a dentist office and they have moved to electronic health records. To be frank their business continuity plan is non-existent. If their server crashes, that office will effectively be out of business. They do have an IT service which handles most of their basic techie stuff. Unfortunately, that’s all they do and are, techies. They have no clue on the business aspects of IT and how to provide services based on business needs. I’ve actually been toying with the IT of becoming an IT consultant to the medical industry with a focus on the smaller practices. IF my job (which is on shaky ground) ends up in a layoff, I may just go that route because the market seems to be wide open right now.
There’s such a disconnect between the stock market and the economy that it’s difficult to anticipate what will happen in the short-term. Obviously, the long-term is much easier to predict. I think of Bill Gross shorting US Treasuries a few years ago only to watch investors flock to the “safe” investment. People are irrational – and herding definitely plays into that. It doesn’t help that every “expert” on TV is a cheerleader rather than a true analyst.
I would love to know what makes one of your above readers long on America versus “other countries that are less fundamentally strong.” As soon as the Eurozone clears up their disasters, the rest of the world will see what a mess we’re in, in America.
You highlight exactly why a long-term view is the best when it comes to investing. And your right, market performance and economic outlook is widely disconnected, until the reality hits and then it’s a panic and everyone sells low (which is fine by me because I’ll be buying). Truth be told, although we are in bad shape from a few different economical perspectives, Large U.S. corporations seem to be in pretty decent shape with large hordes of cash. It’s an unusual situation but I think many of the larger companies are pretty well positioned to weather any upcoming storms.
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I completely agree with your concerns – I have had thoughts about pulling a lot of my investments out of the market (temporarily) or moving retirement funds into more risk-averse accounts, particularly before the “sequester” takes effect next week.
I’ve pulled some out and put trailing stops on some others. I’m not ready to pullout though. Then again, I’m pretty risk tolerant so what I’m doing fits my profile. Friday’s market rise kind of paints me as a chicken little lol.
Hi Jose–I completely agree with you here, this is a time for caution. The masses tend to over-invest at market tops, and this is starting to look like a classic top.
I also agree on prices of gas and the payroll tax hike as areas of concern. The fallout on those probably won’t be fully appreciated until later in the year. Right now people are bubbling with enthusiam early in the new year.
We have to focus mostly on interest rates though. Record low rates are buoying stock prices because there are no relatively safe investments that offer any kind of decent return on your money. Continued low rates will probably keep the stock market bumping along the top. But when rates turn up, the stock market will fall, and it may fall hard at that.
I think that the zig-zags in the equities markets over the last few days reflect what I’m warning about. I think there’s enough money being taken off the table to cause the drops by folks that agree that this is a market top but still enough fresh money going into the markets to bolster it back up. I’m not sure how long that can or will continue. Gas and super low interest rates are definitely going to have an impact. While doing my parents estate planning in Florida I was amazed at what the MM accounts are paying. 1/4 of a percent and that’s a high rate! People can only tolerate that for so long and have to put the money somewhere, I imagine some of it is ending up in equities right now.