Why is the stock market so high?
The stock market has been riding high as of late, but now may not be the best time to celebrate. There are numerous factors contributing to the stock market highs, so we’ll take a look at a few of them and answer the question, “why is the stock market so high?”
First, we can thank the bond market for the continued rise in the stock market. Bond yields are incredibly low. As of August 1st of 2016, daily treasury yield curve rates were 0.20% for a one-month note, 0.50% for a 1-year note, and 1.06% for a five-year note. What these low rates do is make stock dividends look more appealing. The average dividend for the S&P 500 stock index is around 2.1% which is almost double the percentage on a five-year treasury note. Therefore, investors are fleeing bonds and flocking to stocks as they seek higher returns.
Another factor contributing to stock market highs are record low interest rates. Companies are using these low interest rates to borrow money and buy back their own stock, thus bloating the value of their shares in the short term. The problem is that this practice will skew their debt-to-earnings ratio and possibly hurt their stock value in the long-term. I’m not saying that stock buy-backs are a bad thing, but doing it with borrowed money may not be the best idea.
We can also thank the Federal Reserve for the stock market highs. With years of cheap money and multiple rounds of quantitative easing, investors funneled this “free money” into the stock market. This, too, inflated stock prices well beyond their actual value.
Now, here come the warning signs. More than a few billionaires are dumping their shares of American stocks quickly and quietly. George Soros quietly sold his shares in Goldman Sachs, JPMorgan Chase, and Citigroup.
Warren Buffett’s holding company, Berkshire Hathaway, has dumped approximately 19 million shares of Johnson & Johnson. Yet another billionaire, John Paulson is getting out of U.S. stocks. Paulson & Co. sold off its shares of Family Dollar and Sara Lee. In similar fashion as George Soros, Paulson & Co. also sold 14 million shares of JPMorgan Chase.
Jeffrey Gundlach, who oversees more than $100 billion at DoubleLine Capital, said in a recent phone interview, “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good. The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”
An August 1, 2016 article on Fortune.com was titled, “Goldman Sachs Says It’s Time to Sell Stocks“. In the article it was stated that a team of Goldman Sachs analysts downgraded their three-month outlook on equities to “underweight”, which is another way of saying “sell”.
Fixed Index Annuities as Alternative to Stocks
For individuals nearing retirement, a stock market plunge could spell disaster for future security. An option that can help protect assets from stock market loss is a fixed index annuity. A fixed index annuity is a contract between you and an insurance company where you pay a premium or series of premiums to the insurance company in return for regular income payments over a period of time, beginning at some predetermined point in the future. A fixed index annuity (FIA) may be funded with qualified or non-qualified funds. In other words, you could rollover your 401(k) into a fixed index annuity IRA, or you could fund the FIA with cash that you have saved for retirement.
One of the major selling points of a FIA is that your principal is 100% protected against stock market downturns while also allowing you to participate in gains. Premium payments to your annuity grow tax deferred, and there is no limit to how much money you can deposit in a non-qualified Fixed Index Annuity. However, if you rollover qualified money from a 401k into an IRA Fixed Index Annuity, annual contribution limits still apply.
Why is the stock market so high? As you can see, it has been propped up loads of “free cash” from the Feds, quantitative easing, low interest rates, and low bond yield rates. So, what could go wrong with that? Well, eventually, overvalued stocks will realign with their price-to-earnings ratio and it would be ill-advised to have all your money tied up in stocks when that happens. Now might be a good time to take a look at protecting your hard-earned nest egg from the next stock market “correction”.