Let the Stock Market Rally Not Blind You to the Risks 2017 has been one of the brightest years ever for the US stock markets. But there are things investors need to watch out for.
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People even remotely connected with conventional or online stock trading would have noticed that 2017 has cast sunny weather on the stock exchange. Stock markets are on a roll, and the year has begun well. The Dow Jones Industrial Average crossed 20,000 in January while February has continued to witness the rally. Overall, US stocks have gone up around 7% since Trump’s victory and analysts consider this to be the “Trump rally”. This has contributed to the present bull market being among the longestin US financial history. Bracing for Stock Market Corrections However, analysts do point out that investors must not get complacentand there are some risks that lie hidden. Primarily this deals with the periodic stock market corrections that have been happening every 7 months all the way since 1932, as we check the history of bull markets. These corrections or drops are of 5% at least but could sometimes go all the way up to 10%. That’s what investors need to be wary of. This time though, US stocks have been through almost a whole year without even a 5% drop in value. The stock market is also currently overvalued. An example would be the S&P 500 Index which is currently at around 25, significantly higher than the historical average that is somewhere around 17. With the Trump effect, you may find your portfolio having tilted too much towards stocks. If that’s the case, you need to balance stocks with cash holdings, bonds and other such asset classes. Federal Reserve Decision Determines Health of Businesses In the current situation, it’s the political scenario that needs to be understood as well. Investing and stock trading are directly impacted by law and regulation changes as well as alteration to public policies. As of now, there is the increasing likelihood of the Federal Reserve hiking its interest rates. This will:
Cause other interest rates to climb and increase the costs of borrowing for businesses
Make the stock market more nervous and hamper the growing economy, and
Contribute to bond investments declining
Longer term bonds usually experience more severe declines. In such scenarios, fixed income allocationsare moved by investors towards shorter-term bonds.
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Staying Calm as You Figure out What Trump Has in Mind The other uncertainty deals with what the Trump administration’s policies actually come to be, compared to what was told during his campaigning. Trump’s presidential campaign ran on aggressive promises, and while the early decisions made during his presidency certainly lived up to them, there is a bit of contradiction that sometimes comes out through the statements made by various departments of the Trump administration. When such contradictions show up, investors may be confused as to what to expect from the economy, which affects financial planning. One example of this is:
Trump criticizing the high US dollar value in relation to other currencies leading to American exporting companies losing their competitiveness in international markets.
However, Steven Mnuchin, Secretary of the Treasury has supported the strong dollar policy in Senate committee hearings.
The value of the dollar is really important for financial markets and corporate profits.In circumstances of seemingly contradictory views from the same administration, there will be uncertainty and apprehensiveness for markets and greater risks for investors. So it’s better to be patient and not respond to every headline, rumor or tweet being broadcasted by the media or Trump himself, and to wait for the real political outcome. It’s important to avoid haste when it comes to portfolio decisions. But remember to brace yourself for any corrections.
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