The reason U.S. stock prices are justified, and may head higher, is that conditions elsewhere in the world are so bad. The worse conditions get, the lower interest rates may go and the more attractive U.S. assets will look. If things keep getting worse, U.S. stock prices may indeed keep going up.
Enjoy the ride while it lasts
How long can this kind of feedback loop continue? At some point, presumably, the bad news elsewhere in the world will overwhelm the positive effects of lower interest rates for U.S. stocks. We have seen signs of this both last year and this year, only to have the market bounce back.
No one knows when this change of mood will happen, but as we have discussed before, a recession here could cause it. At that point, markets start to revert to fundamentals—which, in this case, probably includes lower valuation levels and a potentially significant decline in stock prices.
Enjoy the ride up, as it could well continue. Just remember that, as with any roller coaster, the ride up usually comes with an exciting drop not too far ahead.
The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials, including stocks that trade on the New York Stock Exchange.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by McMillan.
