Across the board, investors are striking it rich

Sat May 18 2024
Ramesh Sridharan (919 articles)
Across the board, investors are striking it rich

Investors are finding success in almost every market.

In a remarkable display of economic strength, the Dow Jones Industrial Average reached a historic milestone on Thursday, surpassing the 40000 mark. This achievement is a testament to the robustness of corporate profits, the stability of the job market, and the alleviation of inflationary pressures.

It’s interesting to observe the upward trend in various assets, including established Dow stocks, faster-growing tech shares, bitcoin and other cryptocurrencies, as well as gold and other precious metals. Investors who prefer to play it safe have a variety of options available. These include certificates of deposit with yields of around 5%, as well as increasing opportunities in junk bonds and other fixed-income investments. This adds to the overall positive outlook.

According to Ben Inker, co-head of asset allocation at Boston-based investment firm GMO, growth stocks come with a hefty price tag, while the rest of the market remains relatively affordable. According to him, the current investment landscape offers a multitude of appealing options, making it an exceptionally attractive period in the past 24 years.

Despite the general pessimism surrounding the economy, driven in part by the ongoing issue of high prices, Americans display a more optimistic outlook when it comes to stocks.

Zakeyma Peterson, a 35-year-old makeup artist in Brooklyn, N.Y., expresses her desire to expand her portfolio, as she notices the overwhelming crowds at Bergdorf Goodman and Sephora whenever she visits to purchase products for her clients.

‚ÄúPeople will always find something to complain about, but they continue to make purchases,” remarks Peterson, who began investing in March 2020 while she was at home without any clients during the pandemic.

The Dow’s ascent to 40000, along with the significant increase in other market indexes, occurred in two distinct phases. Last year, the markets experienced a surge as there were expectations that a decrease in the rate of inflation would enable the Federal Reserve to reduce interest rates.

In recent times, there has been a sense of relief regarding strong earnings and a lot of excitement surrounding the progress made in artificial intelligence. Efficiently generating and evaluating large data sets has the potential to drive various advancements and enhancements, according to optimistic views. These could include streamlining construction operations, improving manufacturing processes, revolutionizing education, and advancing pharmaceutical research.

There is a new class of obesity drugs called GLP-1s that could potentially bring about new health benefits for Americans and potentially reduce overall healthcare costs in the long run. There are also those who highlight the potential benefits of companies’ efforts to bring manufacturing and other endeavors back to the U.S. from abroad.

“We have made significant alterations to the economy,” states Gary Cohn, vice chairman of IBM and former director of the National Economic Council. Companies are making significant investments in the United States, surpassing previous levels of investment.

Even those who were once skeptical are becoming more positive about stocks. In January, Steve Eisman, a senior portfolio manager at Neuberger Berman, expressed concern on CNBC about the overall optimism at the start of the year.

According to Eisman, the current market situation is more favorable compared to the 1990s. Back then, low unemployment and the hype surrounding the internet fueled a frenzy in the tech industry.

“I’m feeling quite content,” he says.

According to Chris Davis, chairman of Davis Funds, who typically sees himself as a cautious person, there are currently many stocks available at attractive prices. He believes that the current market conditions are favorable, with everything feeling just right, like the story of Goldilocks.As expected, the story of Goldilocks concluded with the bears returning home and chaos ensuing.

There is a concern that the U.S. government will have to pay an extra $1.1 trillion in interest over the next ten years, as projected by the Congressional Budget Office. According to Bill Gross, the co-founder of investment giant Pacific Investment Management, the government’s borrowing and spending have been excessively high, resulting in an increase in 10-year Treasury yields and potentially causing harm to the economy.

“At some point, increased yields will inevitably have an effect,” he states.

There is a growing number of optimistic investors, which raises an interesting concern. Positive market sentiment is generally favorable, but analysts express caution when the majority of investors are optimistic. This indicates a potential scarcity of bearish investors who may change their stance and start buying.

Investors often struggle with timing markets and can become overly optimistic right before a market downturn. According to the Investors Intelligence Bull/Bear Ratio, there is a prevailing sense of optimism among respondents. As of May 14, 56.5% of participants expressed a bullish outlook, while only 17.7% indicated a bearish sentiment.

“The S&P 500 has experienced a significant increase of almost 50% since the bear market low in October 2022, leading to a widespread bullish sentiment,” comments Ed Yardeni, a renowned economist who has consistently maintained an optimistic outlook over the past two years. However, he expresses concern regarding this sudden shift in sentiment.

There are skeptics who argue that the optimistic outlook for the economy may not be as promising as it seems, and that potential challenges may arise in the coming months. According to Joseph LaVorgna, the chief economist of SMBC Nikko Securities, the soaring housing prices and steep mortgage rates pose significant challenges for numerous Americans in their quest to own a home.

Wealthy Americans, including baby boomers, continue to enjoy favorable financial situations. However, members of the Federal Reserve have expressed worries regarding the financial well-being of low- and moderate-income households. These consumers have depleted their savings and may be facing growing financial strain, as stated in the minutes of the Fed Open Market Committee’s late-January meeting. According to the Fed members, there has been a rise in the utilization of credit card revolving balances and buy-now-pay-later services, along with an increase in delinquency rates for certain types of consumer loans.

In a report titled “We Are Not Fully Out of the Recessionary Woods,” LaVorgna expressed his belief that consumer spending and labor demand will slow, indicating that the economy may still face challenges ahead.

David Foley, a 64-year-old in Skidaway Island, Ga., remains unfazed by any concerns as he continues to invest in stocks, even after retiring four years ago. Some of his friends have suggested that he diversify his investments and consider safer options like bonds. He has no intention of doing so, noting that stocks have recovered from significant drops in the past ten years.

“I have confidence in the future of America,” Foley expressed. “It has proven to be a highly effective approach.”

Ramesh Sridharan

Ramesh Sridharan

Ramesh Sridharan is our Stock Market Correspondent covering events and daily movements of stock markets in Asia. He is based in Mumbai