St. Augustine Woman's Journal - Educational Resource to the Women of St. Johns County Since 2009

By Rosa Shala
Shala Financial 

Today's Record Market Highs Offer More Cause for Concern than Comfort


February 1, 2017 | View PDF

Before you get too excited about the stock market hitting record highs recently, keep in mind the term, "irrational exuberance." It was coined by former Federal Reserve Chairman, Alan Greenspan, and it is used to characterize a market that appears overvalued in relation to economic fundamentals.

I believe the market has actually been "irrational" and largely out of whack with economic realities for years now. While the Federal Reserve's reckless use of artificial stimulus after the financial crisis did help spur an asset recovery, the actual economic recovery has lagged far behind. Although quantitative easing ended in late 2014, that deceptive disconnect between the financial markets and the economy remains firmly in place – as this latest bull rally clearly demonstrates.

As far as the economy goes, many domestic reports over the past year have been unimpressive, if not downright gloomy. Corporate profits have continued to decline, jobs figures have been a mixed bag, and GDP growth has been miniscule throughout 2016. Globally, the picture is even worse, with China and many other major markets still struggling, and the already unstable European Union now reeling from the shocking departure of Britain.

The bottom line for everyday investors is that "irrational exuberance" - whatever the forces behind it may be – is generally considered a warning sign that the market is overvalued and potentially due for a drop. In light of the fact that the current market is, historically speaking, overdue for another major sustained drop (which would be the third such drop since 2000), I suggest that investors anywhere near retirement look closely at their market exposure. After all, even though sheer momentum could keep the rally going for a little while, when the bubble finally bursts, everyday investors – not big traders – are the ones most likely to get caught in that next big downturn.

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