On Thursday, the Dow broke the 25,000 barrier for the first time, and technology stocks are soaring to new highs. But that may not be such good news for investors. So what should they do?
In the midst of a long-running bull market reaching momentous proportions, most investors may have forgotten that just two years ago, during the first five trading days of 2016, the market dropped 6 percent. It was the worst five-day start to a year ever and supposedly a harbinger of bad times.
We know where that ended. Spurred by Donald Trump’s election that November, market indexes surged to record levels and went far higher this year. The Standard & Poor’s 500 index gained 19 percent in 2017, the Dow Jones industrial average rose 25 percent, and the technology-heavy Nasdaq composite leapt 28 percent.
There wasn’t a single day last year when the S&P 500 fluctuated more than 2 percent, a level of low volatility unseen since the mid-1960s, says James Stack, a market historian and president of InvesTech Research.
In a rare convergence, investor euphoria spread across the globe. A measure of market performance, the MSCI All Country World Index, gained 22.7 percent last year, closing at a record high. And so far this year, stocks have continued their advance.
On Thursday, the Dow broke the 25,000 barrier for the first time, and technology stocks are soaring to new highs. Cryptocurrencies like bitcoin are adding a whiff of bubblelike mania.
And that may not be such good news for investors.
“If there are any certainties, one will be that this party will eventually come to an end,” Stack said. “A correction would be healthy. The longer we go without one, the greater the risk this will end badly. A lot of people will get hurt. And when it ends, it will end badly, and with high volatility.”
That doesn’t mean the end is imminent, according to Stack and other investment managers and market experts. All of them successfully navigated markets last year, when the greatest risk was being underinvested.
“Everybody thinks the market is overvalued,” said Jerome L. Dodson, the founder and president of Parnassus Investments. “So do I. I’m expecting a correction, but I was expecting one after Trump was elected. I was wrong. The market can keep going up even when it’s overvalued.”
Dodson didn’t move into cash last year. His Parnassus Endeavor Fund, where he’s the portfolio manager, gained nearly 20 percent last…