Dow Tops 13,000 Again — Time to Get Some Chips off the Table?
As major stock indexes blow through key markers in 2012, we must ask ourselves an important question: Is it time to get some of those chips off the table? For those of us who’ve been in the business a while, the current situation with investors and the media is eerily similar to February of 2000, when major indexes were all hitting historical highs, or even October 2007, when the Dow hit its all-time record high of 14,164.53.
Where now, Dow?
The Dow has now had five winning months in a row. So where do we go from here? Is the market more likely to go up or down? Do I hear Dow 14,000? Are we more likely to see another thousand points up on the Dow before we see it drop back to 12,000? Is the Dow breaking out or topping out?
The S&P 500 is up 25% since its low in October of last year. The first time the Dow closed above 13,000 was April 25, 2007. The last time it closed above 13,000 was May 19, 2008, when it closed at 13,028.16.
‘Irrational Exuberance’ all over again?
Signs of overconfidence in the market are a major reason to be concerned right now. Regret is a powerful motivator and many investors that have held on the sidelines watching this run-up may now find themselves unable to resist any longer and jump into the market at exactly the wrong time.
Some of the key economist who were accurate in the past with their predictions now say that the market’s advance can be measured in weeks, not months or years! Dr. Robert Shiller, renowned head of the economics department at Yale University and author of the bestseller Irrational Exuberance is sounding the alarm about the market.
Shiller’s observations about the direction of the market are just as alarming now as they were in 1996, when he correctly predicted the market crash. Keep in mind, Shiller also predicted with 100% accuracy the housing crash.
Here are some of Shiller’s latest comments about the economy and why this might be the right time to get out of the market. (Interviewed on CNN Saturday, March 3, 2012.)
Oil is up 40% since October of 2011. Gasoline is up $.46 in just 2012 and has increased every day for the past 25 days. A barrel of oil could easily get to $150 per barrel in the coming months. If oil spikes due to refinery problems and/or political problems with Iran in the Strait of Hormuz we would be in for big trouble. The winds of war are blowing right now. Should there be problems between Israel and Iran it would be even bigger trouble.
Home values have declined 33% since the top of the market and there are further declines ahead. Furthermore, there are still millions of home foreclosures in the pipeline.
In 1998 the price of a barrel of oil was $12. Today its $112. What’s causing this, when we hear that consumption in the United States is actually down? The answer is China and India.
Five years ago China was consuming 3 million barrels of oil a day; today it’s 10 and projected to be 15 million a day in the next three years. India five years ago was consuming 1 million barrels per day and is now consuming 3 million barrels per day. Does anyone truly think that China and India’s thirst for oil will subside in the future?
Recovery signs may be fool’s gold
Shiller along with four other top economists concluded that the signs of economic recovery are simply fool’s gold. Are we in for a recession this summer? Many economists think that that is a real possibility.
With the election in November being essentially a 50-50 affair right now, events such as the price of gasoline, unemployment, international terrorism, and the threat of a war with Iran are all possible ways that the stock market could become unhinged.
The most bearish of bears see devastation ahead. Harry Dent said on February 27, “This will be a repeat of 2008–09, only bigger when it finally hits.” Dent believes that with central banks flooding money into the economies around the world, a short-term boost has been given stocks.
Echoes of past crashes
Some see an economic 9/11 coming due to policy makers’ inability to solve the world’s financial and economic woes. [USA Today Feb. 27th, 2011]. Some see similarities between now and the 1930s. After the great stock market crash the market saw a significant market rally which ultimately failed and plunged the market even further than 1929. Some believe that our current market rally will fail as well with the Dow plunging below the lows hit in March of 2009.
So what has the super bears so worried? Dent believes the combination of aging baby boomers exiting their big-spending years and a shift towards debt reduction and austerity around the world will cause the economy to suffer another severe downturn, making it more difficult for the government and Federal Reserve to avert a new meltdown. Dent’s advice is to simply get out of the way.
Investors on the sidelines
Given all the talk about 13,000, why is it that so many investors stayed on the sidelines? Some of it can be found in the fear about the rising tensions between Israel and Iran. Some of it can be attributed to the fact that most see 13,000 as no big deal.
When the Dow closed at 13,009.12 on Tuesday, February 28, 2012 that was its highest level since May 19, 2008, but was the ninth time since 2007 that the closing value of the Dow climbed across the 13,000 milestone [Source: WSJ Market Data Group]. Along the way, the index had sunk below (and then bounced back over) the 12,000; 11,000; 10,000; 9,000; 8,000 and 7,000 thresholds more than 300 times.
Lessons from the stock market
If there was any lesson learned over the past decade, it’s that no one has a crystal ball. For clients who are simultaneously attracted to, yet frightened by the market, there are answers that allow them to protect themselves on the downside while sharing some of the upside. Having your cake and eating it, too, is still possible for investors.
Interestingly, one of Shiller’s recent proposals is to introduce shared appreciation mortgages, which would give homebuyers downside protection in return for a share of the upside appreciation.
Is anyone thinking “indexed annuity” yet? Now is the time.
About Marc Weiss
Archer Weiss Insurance and Financial Services
Marc’s career spans over 30 years, specializing in retirement planning for retirees, business owners, television and motion picture personalities and healthcare professionals. His expertise includes investments, distribution planning, legacy transfer strategies, financial planning and insurance programs. Marc has also been featured on The Business Channel.