May was a bit of a rocky month for investors- that doesn’t mean we’re in a stock market bubble. The Donald Trump-fueled bull market continued to climb, with the Dow surpassing 20,000. However, political turbulence dampened that rise. Investors became wary of whether or not the markets would be able to sustain that growth without the tax plan the president promised. On the whole though, investors continue to have confidence. Plus, the Dow has slowly continued its climb, confirming their suspicions.
Typically, this would be expected since there’s no event or legislation that would have scared off investors yet. With the fiscal budget, healthcare, and tax plan still in flux, it’s a great time to keep buying stocks.
‘We’re Not in Bubble Territory”
One of the biggest issues holding some investors back is the idea that we’re in a stock market bubble, and it’s going to burst. We’re not even eight years out from the recession. It’s easy to see why that would unnerve people, especially if they suffered losses. However, one of the savviest investors, Warren Buffet, has sought to allay some of these fears. He flatly explained, “We are not in bubble territory or anything of the sort.”
Of course, economic cycles are just that: cycles. So, eventually, what goes up must come down at least a little. But, that doesn’t make it a stock market bubble. In fact, it’s been the slow rise of interest rates that have allowed stocks to continue to grow at a sustainable rate. It seems crazy to think that the market continues to hit historic highs and that it’s not in danger of collapsing. But take a look at the trajectory of the rise and it’s easy to see why.
Look for the Stock Market Bubble Warning Signs
Economic growth has been slow, but it hasn’t been erratic. In fact, one of the only areas that analysts seem to be concerned about bubbling is subprime auto lending. This is a result of people trying to get back on their feet after the recession destroyed their credit. However, this likely wouldn’t be something that would shake up the markets so much that it would be considered a large-scale bubble bursting. It’s simply too stable right now for that.
Another warning sign would be if the Fed raised rates faster than they currently are. This seems highly unlikely to happen. Candidate Trump criticized the slow pace of raising rates. President Trump has reaffirmed that this is a good pace to ensure that the economy grows in a stabilized way. He also hopes his policies, once enacted, will bolster the economy in a way that would lend to larger rate raises and business growth. However, until those policies go into effect, the key is to be on the lookout for anything happening in the market. Be especially aware of things that seems sudden or irreparable in the short-term. Large, quick rate hikes, a housing crisis (which seems unlikely at this point in time), or some other event.
Ignore the Hype
The key for any good investor to succeed in the event of turbulent times is to keep your wits about you. This should be the case even now, when things are relatively stable. It’s easy to let a 24-hour news cycle whip you into a frenzy over buying and selling. However, look at a couple of semi-recent events: China’s currency issues and Brexit. Both times, investors spooked, but the situations stabilized in a matter of weeks. In that case, lots of money was lost and it was expensive to buy back into the game.
Keep an eye on your investments but be level-headed. Listen to advice but don’t always take it. Ask yourself why you bought a certain stock and if what’s happening right now changes that. Let’s take Tesla for an example. This company seems like a sure thing for some investors, but volatile to others. The the ones who like it, they’ve kept the long term in mind, instead of the company’s recent failures to deliver products on time. They also realize it’s a new tech company as opposed to a standard car company. As time has proven, the investors that stuck it out were smart to think for themselves. This was true even during the February 2016 dip. They also were able to pick up some extra stock during the downtimes as well.
If you’re a new investor, though, and aren’t really sure what to think when headlines about bubbles keep popping up everywhere you look, turn to a financial professional who has proven, long-term results. After all, when it comes to investing, it’s about the long run, not getting rich quick.