The operative word above is reason, which frames the question in a rational context. We all know that investors and markets often move with irrational motivations, especially in short-term periods. After another strong gain in November, the U.S. market took a dip Friday morning, December 1, when the news came out that General Michael Flynn pled guilty to lying to the FBI and is now cooperating with special counsel Robert Mueller.
The Dow Jones fell 292 points by 11:30 a.m. Eastern time, and a headline streamed across my TV: Stock Market Plunges after Flynn Pleas Guilty. I want to caution you, our clients, to think more deeply when you see headlines like this. From an opening level of 24,278, a “plunge” of 292 points is equal to 1.2%. This exaggerated language is like a situation where, for example, I manage to lose two pounds and someone sends out a tweet: Jim Bell is starving himself to death! The Dow Jones closed the day on December 1 down 41 points or 0.17%. So much for early morning drama.
As we near the end of 2017, the rational reason for the market to go up is based on the U.S. economy being driven by one of the strongest periods of growth in its nine-year expansion. Upbeat measures of consumer spending, home sales, and business investment support more growth in the stock market. Some of the market’s rise is currently fueled by the tax reform bill passed by the Senate this past weekend.
The bond market, as measured by the U.S. 10-Year Treasury, has been remarkably stable this year with the yield now slightly lower than it was at the beginning of 2017 — and all this in spite of the Fed raising short-term interest rates. One real benefit for the economy is that mortgage rates are actually lower now than they were at the beginning of January.
This past Sunday, Warren Buffett appeared on CBS Sunday Morning and offered this year-end advice:
Emotional stability is the most important characteristic of successful investors. With the exception of my private jet, the rest of my life could be lived by anyone earning $100,000/year. You are a rich person if the people you really care about love you.
Jim Bell, CFP®
President, Chief Investment Officer