Amid all the negative economic updates in the financial news lately, you might have heard some forecasters announce that the Dow Jones Industrial Average (DJIA) could top 40,000 in the next few years.
Regular viewers of my show "The Income Generation," as well as regular readers of my blog and financial column, probably know how I feel about this, but when it comes to something as important as your retirement future, I think it’s worth looking into all possibilities.
The DJIA had achieved a record high closing on October 3, 2018—a record high which lasted until June of this year. That record high close was the culmination of 96 new record highs set since the 2016 presidential election. Although the Dow had traded mostly sideways until it was finally able to touch new highs at the end of June, some analysts believe the Dow will be able to avoid another major correction and hit 40,000 in the next few years.
But what is that forecast based on – and how feasible is it?
Besides experiencing the worst December ever, 2018 was the stock market’s worst year in a decade. Though the markets have managed to regain most of those losses, many wonder how much longer this run can continue.
In May 2019, fear regained control of the markets as Trump ramped up his trade war with China, and a flat yield curve triggered new fears of a recession.
Although the Dow and the markets have trended upward since recovering from their almost 60% correction in the wake of the financial crisis and Great Recession—I believe the drivers of that growth since 2009 have been mainly artificial.
I also believe the Dow and other indexes are overdue for another major sustained correction – and this one could be in the neighborhood of 40 to 70%.
Obviously, no one has a crystal ball and knows for sure what’s going to happen with the markets or the economy. The best anyone can do is review the evidence, consider it in the context of market history, and build a forecast.
So, what does history say about the stock market’s chances of avoiding a major crash and hitting new highs?
Going back about 200 years, we see that we've consistently had 20 years or so of bear markets, followed by slightly shorter bull markets, followed by more bear markets, and so on and so forth.
In 2013, the stock market broke through its ceiling that existed since the year 2007. Normally that would imply a premature end to a secular bear market cycle and the beginning of a new secular bull market cycle. However, many question this—pointing to the unprecedented level of artificial stimulation that helped the markets along.
So, although it might be possible that the DJIA will reach 40,000 within the next few years, my study of the financial markets over the past 32 years leads me to believe that it’s not probable.
Even if it were probable, I don’t think it should have much relevance for retirees or anyone close to retirement age. That’s because anyone within 10-15 years of retirement should be shifting their focus away from asset accumulation in the stock market and should be focused on protecting their savings so they can use it to generate ongoing income for retirement.
The important thing that stock market investors need to understand is that extended periods of volatility like we experienced in 2018, or even short-term corrections of 10-20%, can be – and often are – warning signs that a major market correction could be on the horizon.
If the analysts forecasting the Dow to reach 40,000 are right, and we entered into a new secular bull market in 2013, that means we will have broken three world records at the same time!
So, with the probability of breaking three world records being unlikely, and with so many conflicting forecasts about the health of the economy and stock markets, my advice for those who are retired, or close to retirement age, is to stop gambling your retirement future on an uncertain stock market. Instead, it might be time to make the shift to investing for income in the much larger and more consistent universe of fixed-income investing.
If you’re interested in learning more about the three world records I’m talking about, visit theincomegeneration.com to download our free research report: The Hard Lessons of Stock Market History.
David J. Scranton, CLU, ChFC, CFP, CFA, MSFS, is a nationally renowned money manager, Amazon Bestselling author, national TV host of Newsmax TV's "The Income Generation," founder of Sound Income Strategies, LLC, and CEO and founder of Advisors’ Academy. With over 30 years of experience in the industry, Scranton specializes in income-generating savings and conservative investment strategies.
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