Economic Update: Buy High, Sell Higher

Buy High, Sell Higher.

That is a counterintuitive headline. Isn’t it buy low, sell high?

Through the three years ending this November 29th, the S&P 500 Index has registered 115 new highs, including 26 this year. The last one occurred on the Wednesday before Thanksgiving. Some 53 closing highs were recorded in 2014, 10 in 2015, and 18 in 2016.

New highs tend to elicit two reactions:

1. Fear that stocks are at a top. Aren’t stocks overvalued? Are equities headed for a big decline? We can’t buy at these levels. Shouldn’t we sell?
2. Jubilation. For some, it leads to a feeling of invincibility. “Let’s load up on stocks (risk) and ride the bull higher.” 

As I’ve cautioned during volatile periods, your financial plan is a financial roadmap toward your personal financial goals. In part, it removes the emotional component that whispers (or screams) “Sell!!,” when stocks are declining. Conversely, it helps prevent undue optimism when shares are hitting new highs.

Selling when the major indexes are closing at a new high simply means that you’ll get a better price today than yesterday. That’s it. In a bull market, we’d expect a series of new highs. Driven by favorable fundamentals, that’s exactly what we have seen.

We are reluctant to forecast where stocks might be next month or next year. There are too many unpredictable variables that can influence short-term action.

However, over a much longer term, stocks have had an upward bias. As 1950 came to a close, the Dow Jones Industrial Average topped 235. By the end of 1975, the Dow closed above 850. At the turn of the century, the Dow had surged to 10,786.

Since 2000, we’ve experience two difficult bear markets. Yet, the U.S. economy and the stock market have proved to be quite resilient. As November came to a close, the Dow topped 28,000 for the first time.

A well-diversified portfolio is akin to an equity stake in the U.S. economy. We don’t know if the economy will be larger next year than it is this year. But 200+ years of history tell us that the economy has expanded over the longer period, and action in the stock market has reflected what’s happened in the economy.

Though not all-encompassing, I hope you’ve found this review to be educational and helpful. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.

Let me also once again emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, let’s talk. That’s what I’m here for.