Investors need a Plan B for 'when things change,' and to be ready to 'cut and run'
Financial advisers watched with a mix of joy and growing skepticism about the forces behind the record rally as two of the most widely followed stock market indexes touched new highs Monday.
The Dow Jones Industrial Average surpassed 16,000 shortly after the opening bell, reflecting a gain of more than 22% from the start of the year. The broad market S&P 500, which has gained 26% so far this year, crested 1,800 for the first time ever.
Meanwhile, the Nasdaq Composite Index, which is up more than 31% this year, is still well off its peak of more than 5,000, a level reached during the tech bubble in the late 1990s. Still, the technology-heavy index is hovering just below the 4,000 mark for the first time in more than a decade.
The milestone coincidences may be just that, according to Sam Jones, president of All Season Financial Advisors, who described the index performance levels as “math magic.”
Like a lot of advisers, Mr. Jones is happy to take what the equity markets are giving, but he is also growing increasingly wary of the market's extended run.
“I think this market is way overbought,” he said. “Over the past 12 months, we haven't had a correction of more than 5%, and people are starting to think that's normal.”
The fact is, with the Federal Reserve's record level quantitative easing program now in its fifth year with no specific end in sight, it has been difficult to apply any parameters to quantify the current bull market.
“Oftentimes, in a great bull market, it doesn't feel that way,” said Marty Leclerc, chief investment officer at Barrack Yard Advisors.
“Advisers have to remind their clients that this past few years is pretty unusual and they have to have a Plan B for when things change,” he added. “This has all been predicated on cheap money and that seems to be here for a while.”
Joseph Witthohn, vice president of product development at Emerald Asset Management, looked past the index milestones to put the market rally in perspective.
“The S&P is up over 26% and of course this is causing some concern, but we've seen it before,” he said. “The S&P's total return has risen more than 26% 13 times since it was created in 1950, which is one out of every five years, and it might just be that this is one of those years. So relax.”
But while Mr. Witthohn is relaxing, Mr. Jones prefers a more cautious approach to current market conditions.
“We've gotten really accustomed to a friendly market, but people need to be reminded that this is not normal,” he said. “It just feels like a setup to me, and that doesn't mean I'm going to act on it or start hedging positions, but I am conscious of it and ready to cut and run if I need to.”
