For the past little while, the financial markets have been doing well, rising up after the tough recession that hit the world in the late ‘00s. Since those days, the market has continued to rise, reaching levels not seen before.
The stock market has hit new highs and many feel that the global recovery is going on pace but new evidence is showing that the global recovery is not as robust as it was once hoped to be, as well as other problems coming.
One issue is gold, which lost $46 per ounce this last week, closing at $1,245.60. While gold is still up $43.70 for the year, there will continue to be a decline and it is possible that for the first time in many years, gold will finish below what it was the previous year. With gold being a big precursor to financial health, the bottoming out of the price could herald a problem down the road for many investors.
Another problem is investor sentiment, which sunk quite low over the past month, leading many to believe that June may not be a great month for the stock market. In fact, the stock market’s sentiment foundation is now weaker than it has been in several months. At the beginning of May, there was a great deal of skepticism in the market among short-term investors. The sentiment seen in the market is what is helping it rise up, and while the rally isn’t close to being over according to some, there is the worry that things will take a turn for the worst.
Looking at the monthly returns of the S&P 500 over the past decade, June is typically the worst month, with an average decline in the market by about 1.33 per cent. If this trend continues, it is expected that June could take a turn for the worse after May saw a slight rise of four per cent.
Is the stock market doing that great?
The stock market is hitting new records every single day, but that doesn’t mean things are as good as they seem. Currently, the S&P 500 sits at 1,923, the highest it has ever been in its history. The problem is, that this does not account for inflation. In order to actually be at the level it was in the late-1990s, when adjusted for inflation, the exchange needs to rise by another 200 points, or 10 per cent of its value, in order to reach that.
As a result, while many may feel that the 1,923 of the market is the highest it has ever been, it doesn’t necessarily mean the market is stronger than it was in the late-1990s when the American economy was booming at a level never seen before.
Looking at the Dow Jones, the thermometer for the economy for some, it passed its prior peak level this year. The peak level had reached its record in 2000. This value is adjusted for inflation. The reason that the Dow actually did hit its mark is because it takes the average stock price of 30 big companies, while S&P 500 takes the market capitalization of 500 large companies. As a result, the S&P is far more accurate.
For the NASDAQ, it has yet to reach its all-time high, which was also set in 2000 just before the massive dot-com bubble hit. What does this mean?
It can be easy to become bogged down in information when dealing with the financial markets. So, if the S&P 500 has not beaten its old record when adjusted for inflation, nor has the NASDAQ, but the Dow Jones has, what does it mean? Well, it means that while stocks could continue to rise, investors must be careful that they do not become complacent in their investing.
Looking at the stock market highs, they happen just before a major pull-back, especially with the dot-com bubble. As a result, these numbers mean that the stock market is quite vulnerable for a pull back and it is expected that in the short term, this month even, the S&P 500 could actually see a drop of 10 per cent or more in its value.
Investing in the stock market is a risky game, but right now the financial market is healthier than it has been in years. As a result, it is a good time to invest but you should be careful with your investments and not sink too much money in. Remember, what goes up must come down eventually.