The band Styx declared it the best of times in 1981. The equity and bond markets have seen both the best and the worst of times over the last 32 years. This week the headlines read new highs for the Dow Jones Industrial Average. Happy Day and happy headlines, but what does it mean and where to from here?
There are two emotions that drive the markets – fear and greed. Fear will always trump greed in the end but right now there is little fear in sight. Retail investors typically put more money in the markets at high points and tend to pull out money after major corrections, largely due to the above mentioned emotions. When you can’t wrap your arms around a physical object – like a sweater at a department store – it is hard to put more money in the market when the price falls everyday. You would gladly buy a sweater that you liked for $50 for a price of $35 but it is because you can see it, feel it and understand it. Investments are more abstract.
The broad market indices have been on a tear for 2013 and the Dow Jones hit a new high on Tuesday. That’s exciting and a great headline but understand since the last high was made a few changes have taken place. In early 2008 Altria and Honeywell were replaced by Chevron and Bank of America. After the financial collapse in 2008 was in full form AIG was replaced by Kraft. Citi and General Motors got the boot in 2009 and Travelers Insurance and Cisco were added. Last year Kraft was removed and United Healthcare was added! Remember the Dow is an index of stocks with more than 45 changes it 116 year history.
Under the hood we find a concerning if not troubling issue. In economics we often use the words elastic and inelastic. Think rubber bands. They are very elastic meaning they can move around and change based on the tension or pressure applied to them. Things that are inelastic can’t change very much. Food for instance is considered to be inelastic as you need to eat even if you are unemployed while the number of times you may eat at an expensive restaurant or shopping at a high end retailer could clearly change if your financial situation changed.
Typically when equity markets reach new highs the top performing stocks tend to be the elastic-type sectors of our economy. Currently we find that healthcare and consumer staples are actually leading the way in 2013 while materials and technology are the laggards. Simply put, that’s just not normal but then again neither is it normal for the Federal Reserve to put $85 billion a month into the financial system!
We live in interesting times full of economic and political disruptions and distortions. Things that normally work on the investment front are finding challenges. Is it temporary or are the distortions and ripples in the markets here to stay. Stay tuned! Regardless of which answer you chose or the inevitable outcome, the market will respond.
Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.
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'Big Joe' Clark: What to consider when the market hits new highs
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