President Trump’s positive reaction to a strong showing of 401(k) accounts at a State of Union address in Washington D.C on Tuesday with met with positivity among many skeptic investors.
With the Dow Jones rising over 26,000 points including the quickest 1,000 point gain over the last year, there is tangible optimism among investors. A 25% surge in 2017 preceded a jump of 6% in January, an indication of the end of a bull market – signs which have even been enough to convince some of the more reserved investors to jump in amidst the euphoria. For those scouring through top financial blogs and personal finance news, there is plenty of opportunity to gauge the common reaction. For many others, decisions will continue to be guided by a sense of subjectivity and conditional probability.
However, former Chairman of the Federal Reserve, Alan Greenspan, predicts that there is an iceberg on the horizon for investors:
Greenspan, who also voiced concerns of the “irrational exuberance” of the dot-com bubble in the 90’s, has echoed the concerns of some who are uncomfortable with the record-highs in stock indexes and federal bonds approaching record lows.
“What’s behind the bubble? Well the fact, that, essentially, we’re beginning to run an ever-larger government deficit,” Greenspan added. “Debt has been rising very significantly” he said, before issuing a warning that “we’re just not paying enough attention to that.”
On Wednesday, The Federal Reserve also confirmed that it holds expectations of a hike in inflation, which indicates that interest rates will follow suit this year. Following what was the last meeting chaired by Janet Yellen (who is set to be replaced by Jerome Powell this week), a statement was released confirming that the US benchmark interest rate would be maintained at 1.25 to 1.5 percent.
“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1‑1/2 percent,” the official statement from the Federal Open Market Committee read.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.”
With sharp increases in profit forecasts following corporate tax cuts in December, stock prices have been pushed by legitimate factors. In terms of rational buying, it would appear that many are comfortable in buying up stock as the demand for goods and services continues to grow globally.
A common concern held among some observers is the potential melt-down which could succeed this current rush of stampeding investors. While in essence, there are a large number of investors guided by the fear of missing out. On the other hand, earnings led melt-ups are uncommon, and melt-ups, in general, have no predictable shelf life. It is not beyond possibility that any potential melt-up, therefore, will not deter traders from participating, and March’s impending decision to be made on rate hikes will likely bring more clarity to investors.
So where does this leave 401(k) investors looking to capitalize on the perceived unravelling of almost a decade-long bull market? The next six weeks will be crucial to finding out.
