Back in early 2000 at the height of the dot-com bubble, experts predicted a Dow Jones index to hit 50,000 by 2020. Today, in 2012, we stand below the inflation adjusted level of the Dow Jones back then. And yet now, with interest rates at virtually zero percent, the stock market has soared to lofty levels again. (Real returns after inflation on yields of fixed income instruments such as CDs are actually negative; factor in taxes, and one is really going backward in purchasing power)
Now we have the stock markets bouncing around near the highs once again and, by some measures, these levels are “normal” and in line with historic valuation models. But in the aftermath of both the dot-com bubble and the real estate bubble collapse in 2008, the stress level of money management is also hitting all time highs. The cries of “This time it’s different” are drowning out Chicken Little’s warning that the sky is about to fall.
Based upon the recent earnings and profits of corporations in America, things appear to be rosy indeed. But with the 100th anniversary of the Titanic just last month, need we be reminded that unforeseen disasters may occur in this market’s uncharted waters? The icebergs amidst us are many. Europe is falling back into a recession (Spain announced 24% unemployment last week), commodities such as oil and gold are at stratospheric levels, job growth is nonexistent and wages are going falling. Add to this list the threats of Portugal, Italy and Greek debt defaults, and the picture becomes even darker.
But one of the largest financial icebergs is that the total market value of all stocks exceeds the current Gross Domestic Production (GDP) of the entire U.S. Historically, when stock prices rose to these levels, eclipsing GDP, a pullback, correction and, ultimately, crash occurred. Sir John Templeton always pointed out that “it is never different this time.” And while Brazil and China are gaining status and spending wildly, it is still wise to take a breather and survey the landscape.
Once again the tech companies are exploding upward. Will this be déjà’ vu all over again? Korea and India are producing luxury cars that are selling like hotcakes. Samsung is gaining market share on Apple with their version of the smartphone and the once heralded Blackberry is seemingly unable to regain its dominance. As Warren Buffet states, “be greedy when others are fearful” and vice versa when irrational exuberance exists. No one knows what will occur next, but one thing is for certain; we better have a safety net — or the protection offered by annuity wrappers — cocooning our retirement nest eggs.
If and when interest rates rise, history may repeat itself. Money may exit stocks and move into higher yielding investments with lower risk. Now is the time to learn to dance with one’s life jacket on.
Michael Ham is the founder of a revolutionary coaching system for licensed agents and registered representatives, www.TheSalesTalk.com. Mr. Ham has 25 years experience in the industry and does not intend his writings to be for general public use; but for licensed professionals.