The stock market has started off 2018 with a bang! Why do we continue to see a strong bull market?
There is no question the markets are off to a phenomenal start in the first week of the New Year. We last week, we saw three record closes in three days. A number of factors are fueling the market’s continued rise. First and foremost, the fundamentals of this economy are great. Corporate profits have been solid, and they will continue to be in the coming year due to the recently passed tax bill that included corporate tax cuts.
Employers continue to hire. We are at full structural employment, and the unemployment rate is 4.1 percent, hovering around a two-decade low. This means more money in people’s pockets that they can spend. This was reflected in strong retail holiday sales. And, in the past year companies have benefitted from the administration’s deregulation efforts in several sectors, which has made doing business easier. Add to this a strong world economy, and the investors continue to see good news ahead in 2018.
While the markets certainly have been on a tear, how have average Americans benefitted?
Obviously, anyone who directly holds stock has reaped the benefits of this bull market. Unfortunately, as many have noted, the number of Americans who hold stock has dropped from 64 percent before the Great Recession to 52 percent now. This is the result of what I call the post-traumatic stress disorder caused by getting burned during the financial crisis. However, many Americans benefit from the rising stock market even if they do not directly hold equities. Anyone who has a retirement account like a 401k, or a pension, are reaping gains.
While the market booms and companies are benefitting, wages are stuck. Why?
One of the primary downward pressures on wages over the course of the recovery was the competitive labor market. As the unemployment rate rose during and after the downturn, and many Americans simply dropped out of the labor force, employers gained the upper hand, and many Americans were willing to work for less. As a result, real wages took a significant hit, and trended downward from 2008 through 2014.
However, in recent years as the labor market has tightened, have we started to see positive real wage growth take hold. In November, 13 states – including California and Texas – reported the lowest unemployment rates in 40 years! This will mean employers are going to have to pay more to get workers, and should help drive higher wages. In addition, a number of states and municipalities have moved to raise their minimum wage in recent years. Together, I think these developments will mean we see workers continue to get raises in the coming year.
Is this a market bubble? Should we be expecting a correction?
Predicting the market is a fool’s errand, but a wise person once said that bull markets do not die of old age. Since this bull market started, we have broken through ten – TEN – thousand point barriers, starting with 15000. At present, we are in the one hundred fifth month of this rally, making it the second longest bull market since WWII, and just 10 months short of being the longest of the post-war period. As I mentioned, the current economic indicators are all moving in the right direction. We are likely to see corporate earnings moderate in this economy, as companies have to pay more in labor and other costs. Overall, however, there are no dark clouds on the horizon at this moment.
What should our listeners keep in mind right now with regard to their investments and retirement accounts?
The main thing to remember is that you are investing for the long-term. Getting wrapped up in the daily, weekly or even monthly scuttlebutt about the markets is counterproductive. You do not want to try to time the markets. Bear markets follow bull markets, and there will be a correction at some point in the future. We will ride that out as well. If you are feeling nervous, just remember that the stock market is the best long-term investment in history. If you keep contributing and stay patient, you will be rewarded.
Thank you Mellody! Looking forward to another great year of Money Mondays!
Me too, Tom! Happy New Year!
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