The Dow Jones hit an all time yesterday, reaching 14,253 at Tuesday's close. This marks an important moment in the bull market we have had in stocks for the past two years.
Over the past two years the market has shrugged off political crisis in Europe, America's debt being downgraded, a slow growth economy, and signs of weakness, then strength again in China.
This market move has been largely driven by three things, in my opinion.
- Quantitative Easing and "Currency Wars"- Ben Bernanke's QE1-3 obviously played a huge part in this market's move over the past two years. The low treasury yields courtesy of the Fed buying bonds has driven some yield-seeking investors into the market who have normally just been in bonds.
- Housing Market Rebound- The housing market has rebounded strongly since the depths of the housing crisis. the Case-Shiller report has shown three consecutive quarters of year-over-year. A Census Bureau report in February showed that there was only a 4.1 month supply of new homes for sale on the market, the lowest since the 2005 housing bubble.
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- Corporate Earnings Strength - Corporate earnings are at an all-time high compared with national income. Given that labor costs are at an all-time low, and interest rates are historically low, companies are able to expand and grow with little cost. This earnings growth has slowed down recently but, it helped drive the market in the early stages of the bull market.
Why the run isn't over yet
(Source: Zerohedge, Dr. Jean Paul Rodrigue, Hofstra University)
So where are we on this chart? I would say that we are somewhere between "Enthusiasm" and "Greed." Anybody who has watched the news recently knows where the market is. CNBC had the nifty graphics for when the Dow crossed above 14,000 and the non-financial media has been covering the market extensively, with it an all-time high. However, baby boomers and many near or in retirement where hit doubly hard. Between 2006 and 2008, they saw both their home prices and stock portfolios decline in value significantly. Many retail investors are still hesitant to get into the market, shown by the consistent decline in NYSE stock volume since 2008.
So where does this leave us in the market today? I think that it is possible that we will skip the "Greed" and "Delusion" phases of the chart. People are still not clamoring to get into the market, and there is still a healthy amount of fear in the market today. This skepticism of the market, combined with very few potential upside catalysts in the coming months, give the market little substantial upside from here. The biggest catalyst to the downside in the market today is the Fed beginning to unwind QE, however it is still a ways off, as the 6.5% unemployment rate the Fed has targeted is still 1.9 million jobs away. For the time being, however, I think it is unwise to fight the Fed, and the continued liquidity it has been adding to the market is not going to stop anytime soon. Nobody has ever lost money by taking profits though, and I don't think it would be unwise to do so with the market at an all-time high.