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The Dow Jones Industrial Average reached an all-time high today, topping the previous record of 14,164 set on Oct. 9, 2007, just before the financial crash that sent the U.S economy deep into a recession. The S&P 500 also came within shooting distance of matching its 2007 high today.
The market continues to climb despite a number of factors that would seem to undermine it: Continued relatively high unemployment, a still soft (but rebounding) housing market, unresolved European fiscal strains and the ongoing federal support of the economy. The mixed messages have many advisors, large and small, fielding questions from clients looking for direction.
“Clients are asking if they should have more exposure to stocks and less exposure to bonds,” says Jeffrey Apps, vice president of private client services at SRS Capital. “I am telling them that we are investing based on their current risk tolerance. Now is not the time to buy more stocks and sell bonds since stocks are at or near their all-time highs and bonds are down year-to-date. Why would you sell at the low to buy at the high?”
The new record high in the Dow caps a climb from when the market hit a low of 4,000 in March 2009. From that point, the index has had a compound annual growth rate of over 37%. But as some advisors pointed out, Tuesday's historic high is inflation-adjusted, indicating that previous records were higher. "Pure price-wise, the Dow has reached an all-time high, but factoring in inflation, the Dow is not at the same value of the previous high,” says Peter D. Rocca of Palisade Asset Management.
“Some clients are asking if we should take our profits and run,” says David P. Gray, CEO and managing partner of Capital Management. “I think clients are concerned with the lack of leadership in Washington and that there does not seem to be clear reasons for this.”
The current peak comes as the WealthManagement.com Advisor Confidence Index spiked in February to 109.7, its highest reading since April 2012.
“The Dow is the only thing making record highs,” points out David Moenning, President, Heritage Captial Management, noting that the S&P 500 is a mere 24 points away from its high, reached on March 9, 2007. “There’s certainly room for the bull to run a little farther. If investors feel is its safe to get back into the market, we should see continued growth.”
Anytime the market reaches new historical highs, it’s natural to ask whether the market is expensive or not. But Robert Davis, chief investment officer of wealth management firm Round Table Services, points out that on an earnings basis, clients are paying less for the market today than they were in 2007. Stocks in the S&P 500 are currently trading for about 13.4 times their expected earnings over the next twelve months, according to FactSet data. At the 2007 peak, they were trading for 15.6 times earnings.
“In addition, corporate America has done a fair amount of deleveraging and has the highest cash balances in a long time. This seems to imply that the risk and valuation of today’s markets is less than that of the 2007 market,” Davis says.
Most advisors suggested that they are trying to maintain the long-term view for their clients, and not be distracted by the headlines.
“While this is all great news, the issues at hand have not been solved,” said Richard J. Martin, a planner with Steihnaus Finacial Group. “And kicking the can down the road didn’t solve it either. Indicators do show good news for long-term investors but we’re rather cautious for the short term and no we’re not investing “new” money into this market.”
Several advisors echoed that caution over the current rally, pointing to the Federal Reserve’s continued support of the economy through QE3 and low interest rates as particularly worrisome in the face of continued deficits.
“Our opinion is to move forward and participate in the Fed’s party, but use caution and get out at the first sign of trouble,” says Charles Park, president and CEO of C.F. Parks & Co. in Salisbury, N.C. “ It always a concern when the market is at a high and the VIX is at a low. So caution is still the word.”
“We are playing the world’s largest game of musical chairs, and someday the music will stop,” says Greg Gardner, founder of the Gardner Group. “We do not want our clients who are either retired or focusing on their retirement date to be standing when the music stops.”
“The one thing that the meltdown of 2008 caused is for everybody to redefine what risk means to them,” he says. “As it turns out, people are not as risk averse as they thought they were.”
“It’s funny but when the market ‘swings’ up 1-2% daily, clients never call in asking about the volatility.”