As the New Year dawns, we find it hard to remember a time when troubling headlines were more pervasive. Many may wonder how the stock market, which is known to react swiftly to news, has once again reached a new high. The fact is, despite these disturbing developments U.S. capital markets have grown attractive relative to alternatives.
Worrisome news seems to crop up every day. Domestic tranquility has been shattered by news of racial discord and violence against police. Meanwhile information technology, for all its wonders, has also enabled undetectable malcontents to wreak havoc. On the policy front crucial reforms of the tax code, entitlement programs, and immigration law are stymied by a polarized electorate. Overseas, liberty is threatened by unfamiliar and ruthless enemies found among nuclear-capable rogue nations as well as new, fanatical entities without national boundaries.
Nevertheless at the time of this writing the Dow had reached a new all-time high of 18,000 and the overall U.S. stock market was poised to end the year with its third consecutive year of double digit returns.
For many, this state of affairs is counterintuitive. To make sense of it, the stock market must be viewed not just as a mechanism for discounting
information but also as one option for investors forced to choose among imperfect alternatives. It serves little purpose to consider these troubling developments relative to an imaginary trouble-free world. Capital markets do not eliminate these risks, but they allow us to measure them, in relative terms, among various markets that compete for our capital. For several months investors worldwide seeking relatively stable, positive real returns have simply concluded that an ownership stake in the U.S. economy has proven relatively attractive.
No asset class, however, is a panacea, so most investors should also hold cash, bonds, foreign equities, domestic and international REITs, and gold. Foreign stock valuations have fallen compared to those of U.S. stocks because the relative risk of investing overseas has increased, but this implies that, other things equal, expected returns relative to U.S. stocks have increased as well. Disciplined investors rebalancing to their target allocations are likely reducing their U.S. stock exposure while adding to their foreign equity holdings.
Rather than trying to fathom the market’s direction as news develops, wise investors will devote their efforts to assessing their own circumstances. Your time is far better spent attending to matters such as estate planning, tax management, and college planning for children, just to name a few, in addition to the basics of asset allocation and disciplined rebalancing.
Also in This Issue:
The Rush to Cash
Price Inflation Update
Unconstrained (Or Undisciplined?) Bond Funds
A Reader Inquiries
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles
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