First of all, I am not making a stock market prediction, nor should you believe that the stock market reflects the economy, political sentiment or the popularity of Pokeman Go.
US stocks have hit record highs recently, mostly because the bad news has receded, interest rates may continue to be incredibly low and may stay that way for a while.
It does seem, though, that conditions are ripe for a continued sweet spot for US stocks. Whether it will turn sour tomorrow or last very long, I can’t say. But let me offer a case for why you should have a broad-based exposure to the best US companies. Here’s why the conditions are ripe for the bull market to continue its run:
— US Treasury Yields have hit all-time lows. With yields under 1.5%, stocks — especially those with 2% dividends or better — look awful appealing.
— The current “slow-mo” economy will continue. That usually translates into continued low lending rates for everyone from homebuyers to big corporations. If the Fed doesn’t have to raise rates, that continues to float all boats.
— Corporate earnings are strong. Even in a slow-mo economy, if big companies can continue to profit, that’s always good for stocks.
— Global crises roil markets, but won’t impact the US all that much. Sure the Brexit and European slowdown are concerns, but they haven’t permanently impacted the US stock market. The initial decline came and went in a week.
With anything connected with markets, things can change overnight. Europe is far from being out of the woods. If the Brexit fervor spreads to other Eurozone countries, that wouldn’t be productive.
You also can’t discount the possibility that low bond yields are foretelling slack demand for credit — and eventually a recession. Keep an eye on economic growth in the U.S. and Europe. It’s sluggish and could slow down more.
Although Liz Ann Sonders, Schwab’s chief investment strategist, is concerned about negative interest rates — it can lead to deflation — “the risk of recession in the U.S. is low,” she said at a Wednesday meeting of the CFA Society Chicago.
The moral of this story isn’t to overconcentrate in stocks, nor should you be trading on short-term sentiment. Those are guaranteed ways to lose money.
You should, however, look carefully at whether your portfolio is balanced. If you’re in your 50s, at least half of your holdings should be in a diversified mix of bonds: Corporates, high-yield, municipals and treasuries from around the world.
Want to hold a big basket of bonds from across the world? Consider the Vanguard Total International Bond Index Fund (VTABX), which owns some 4,000 bonds.
There’s also the “flight to safety” factor. Although US Treasury yields are dismal, they’re still better than German and Japanese bonds, many of which have negative yields. Global investors know they’ll get paid back if they hold US debt.
The stock portion of your portfolio should be a blend of large-, medium-sized and small companies from around the world.
Here’s another reason why you shouldn’t forsake bonds: They outperformed stocks over the past decade, according to Morningstar. While that rarely happens, bond prices have climbed as yields have plummeted. Remember that bear market from 2007-2009?