5 reasons to stay invested
Joel Dresang: Dave, stock indexes have hit record highs. The bull market is eight years old. The Federal Reserve is getting more aggressive at raising interest rates. Some investors are wondering whether this is time to get out of the market. How do you respond to that?
Dave Sandstrom: Joel, it’s certainly an understandable sentiment for people to have. The longer something goes on, the higher the numbers go, it brings about a little bit of anxiety, but there are some compelling reasons to stay invested.
Joel: So, let’s look at some of the fundamentals. We talk about corporate earnings and interest rates driving stocks in the long run. What are corporate earnings doing right now?
Dave: Joel, right now, corporate earnings forecasts are very strong for the remainder of this year and into next year. I think it’s important to understand why you own stocks. It’s to participate in the future earnings of a corporation. And in times where earnings grow this strong, historically that’s been a great time to own stocks.
Joel: What about interest rates?
Dave: Well, interest rates obviously a very hot topic right now. The Federal Reserve is very active in their approach, looking at raising rates this year a couple more times. And it’s easy to think about the fact that, “Well, maybe this is going to cause markets to sell off.” However, it’s important to understand the differences in why the Federal Reserve raises interest rates. They can raise rates to normalize monetary policy, as they’re doing right now, or they can aggressively raise rates later in a business cycle to put the brakes on inflation, and that is not the case at this time.
Joel: What evidence do we have that the economy isn’t getting overheated, that the Fed doesn’t need to slow it down?
Dave: Really, not many signs of inflation at this point, Joel. Remember, inflation just doesn’t show up on your doorstep one morning. There’s really three areas that can cause inflation. One of them is wage pressure. The second one is capacity utilization. And the third being commodity prices. And right now, we don’t see stresses in any of those areas that would indicate that inflation, or large increases in inflation, are imminent.
Joel: How do we know that the economy is strong enough to fuel those corporate earnings you were talking about?
Dave: Well, I think it’s important to look at the economic fundamentals. We can look at things like the housing market, GDP growth, unemployment figures, capital expenditures, consumer sentiment, consumer spending. All of those things, right now, are pointed to some positive numbers, and I think that it’s showing that the economy is on pretty good footing right now.
Joel: What about this march up in stock prices? If everybody else is getting in, isn’t that a time for me to get out?
Dave: Well, Joel, we always talk about a strong bull market climbing a wall of worry. You want to avoid that euphoric stage where everybody’s getting in, not necessarily making good decisions, and it’s more of a greed-driven rally. We don’t see a lot of that right now. We’ve seen some people getting in recently, but we are not over the top on that euphoric sentiment right now in the markets.
Joel: So, if I shouldn’t be leaving the market, is this a good time to get in stronger?
Dave: Joel, I think right now is probably a pretty good time to exercise caution. Make sure you’re at a stock exposure level in your portfolio that’s comfortable for you. And certainly, if you’re in the spending stages right now, it might be a great time to take some profit, take a year’s worth of income off the table potentially, and remember that most important is that balance going forward. Make sure that you have enough bonds in your portfolio to protect you against the really bad things that occur and that stock exposure going forward that’s going to provide that long-term growth.
Dave Sandstrom is vice president and an advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik
Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom
Earnings, interest rates and valuations, a Money Talk Video with Brian Kilb
Talking Money: The importance of balance, a Money Talk Video
(initially posted April 20, 2017)
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