Market analysts are divided on the direction of stock markets shortly.
Some believe the market will maintain the two years of steadily increasing stock prices. Some believe investors’ stocks are on the edge of a cliff with a stiff market correction imminent.
A market decline of 30 per cent has been suggested as likely by some analysts.
Different views on the market’s direction are what makes a market.
After Donald Trump won the presidential election, the market shot up with the Dow Jones Industrial Index jumping 4.6 per cent. Some of the gains have since been lost.
Trump sounded good for the stock market, promising to extend corporate tax cuts set to expire next year. He is friendly to business.
But Trump’s election has introduced uncertainty and investors don’t like uncertainty at all.
He promised to put a 10 per cent tariff on everything imported into the United States. With markup for gross profits, a 10 per cent tariff hike easily translates into a 20 per cent price increase at the retail level — more inflation.
The long-term interest market signalled the tariff potential for inflation and the benchmark 10-year U.S. treasury bill rate increased to 4.44 per cent from 4.26. That’s not a major increase but signals future inflation.
For Canada, tariff increases would cut exports and jobs.
Given the division among analysts and the uncertainty, what should investors do? Any action taken should depend on several factors.
If an investment has risen sharply in a short term and the stock price may be ahead of actual value, investors might want to sell those stocks or take some profit off the table.
One rule of thumb: If a stock has doubled in a short period some profit-taking would be in order.
An unsustainable 15 per cent return will double a stock’s value in five years. If an investor gets five years of growth in a few years or months, taking some or all profits makes sense.
Stocks that rapidly rise in price tend to fall further when the market corrects.
Many long-term investors may just want to hold the stock and ride out the storm.
Younger investors have time to make up losses in market corrections. Older investors have little time to make up for a deep correction.
Another rule of thumb: Buy stocks with good dividend yields and low payouts as a proportion of income and cash flow. That way investors get paid while waiting for stock growth.
Numerous studies of the long term show 40 per cent of annual return on stocks comes from dividends.
Generally, annual dividend yields over six per cent are a red flag, warning of excessive payouts, poor growth outlook, or low industry growth potential.
Dividend-yielding stocks tend to decline less in market corrections.
Caution: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
Ron Walter can be reached at [email protected]
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
