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Monday August 19th 2019

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Dow 16,000? Which Way Will It Go?

A while back I asked the question, “Could the Dow hit 20,000 by the end of the year”, and the market answered with a resounding “NO” yesterday with a wild ride up and down, with a drop of just over 1000 points during the day.

More recently Fannie Mae reduced equity requirements for home buyers, a headline that could have appeared in late 2004 or early 2005.

This is where stock guessers become gamblers and market timing wipes people out.

When the housing market stalls and falls again, which I am guessing is 18-36 months away depending on how the government props up the market like it did in 2005-2006 with artificially low rates and easy money loan requirements.  You don’t think they will?  What about the last major mortgage crisis.  You might remember we called it the “Savings and Loan” Crisis.  The headlines where the same, the result the same.

During the prop up period late in President Carters term and for the first four years of President Reagan, inflation popped up and rates started to rise. The home buying frenzy continued for the early part.

The stock market went flat and lost over 30% over the next several years falling from a high over 11,000 in January of 2000 and falling to a low near 7,500 in 2002 with a bounce up to 14,000 in 2007 before falling back below 6700 in 2009.  That is a 50% drop.

In todays terms of a market that hit 18,000, we are looking at a very serious potential of 12,000 or even 9,500.

Why did this happen?  Very simply investors demanded higher returns.  If TAP is paying a 3.5% dividend at $70 a share, and investors want a 7% dividend, they will only pay $35 a share.  As interest rates go up, stock prices flatten or fall.  Usually.

There are times where for other reasons the stock market cycle gets a bit out of phase with the real estate and bond markets.  Right now it is the simple printing of money.  There is there times more US currency in circulation than there was 8 years ago.  Normally this excess cash makes prices go up.  More money with the same availability of goods and services is inflation.

The press can call it anything they want but that is exactly what it is.  The way to stop it is to raise interest rates as happened with President Reagan took office.  We are seeing the possibility again just over the horizon.

So what can you do?  Some will buy and hold bonds, but some of those bonds will turn to junk too.  Some will buy real estate, and that will become a risky proposition as renters become squatters.

Those who continued to invest all the way through the market came out the back side looking good, simply because the dividend king stocks kept growing the dividends that value investors like Warren Buffet of Berkshire Hathaway and I like so much.

 

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