The Dow closes above 15,000, but this rally feels fake
It was a historic day on Wall Street as the Dow Jones closed above 15,000 for the first time. The S&P 500 also reached a new record, climbing more than 20% since mid-November.
You might think this would be huge economic news for savers who own stocks through their 401(k) and IRA retirement plans or self-directed portfolios.
When the Dow broke 14,000 in October 2007, middle-class investors rejoiced. It seemed our hard work was paying off, and we were on our way to financial security.
Then the poop hit the fan and, 5 1/2 tough years later, I doubt this milestone has many of us jumping for joy or dancing in the streets.
I think the problem is that this rally feels like a fake. A fraud. Something that's been engineered … not earned.
Bull markets you can believe in, the ones that generate real and lasting wealth, are driven by a healthy, growing economy.
But stock prices are rising much faster than the nation's tepid economic growth would seem to justify. Corporate profits are at record highs, but unemployment remains high and wages aren't growing much.
The country just isn't prosperous enough to deserve the extraordinary run-up in stock prices that we've seen this year.
WALL STREET ROUNDUP for May 7, 2013
|Index or Investment||Close||Change||Percentage Change|
|Dow Jones Industrials||15,056.20||+87.31||+0.58%|
|10-Year Treasury Yield||1.78%||+0.01||----|
It seems like this record run owes more to the Federal Reserve and its long, determined campaign to push interest rates to record lows.
When the Fed makes it impossible to earn a reasonable return on CDs, money market and savings accounts, it pushes savers into riskier investments, such as stocks.
Although middle-class savers resisted that pressure for a long time, retail investors as we're usually called on Wall Street, have rushed to join the rally this year.
Mutual funds and exchange-traded funds that invest in U.S. stocks grew by almost $52 billion during the first quarter, according to TrimTabs research.
That was the biggest net increase since the first quarter of 2004 and almost all of that money came from retail investors.
As we piled into stocks, savings deposits fell by 66% during the first quarter and were only half of what they were in the first quarter of 2012.
This make's Wall Street's record run feel more like a policy victory for Fed Chairman Ben Bernanke.
We're just the guys being manipulated, which is not an easy thing to feel good about — or celebrate.
When I look at my portfolio today, I don't feel rich. That's because, in many ways, I'm not that much further ahead than I was in 2007.
And don't forget that the last time the Dow reached a record high, it nosedived more than 50% in the following 18 months, tumbling to 6,600 by March 2009.
After everything we've been through since the housing bubble burst, triggering the financial crisis and Great Recession, I'm inclined to believe something bad is lurking just around the corner.
One thing that we know we're going to face in the coming years is higher interest rates.
The Fed says it won't let short-term rates go up until the unemployment rate falls below 6.5%, or a full point lower than it is today.
Most economists don't think we'll create enough jobs to reach that until 2015, but at some point the Fed will have to end its unprecedented intervention in the economy.
When Ben and the other governors allow interest rates return to market-driven levels, it's not hard to imagine many savers who have been coerced into stocks fleeing back to the security of CDs or money market accounts.
What happens to the Dow, and what could very well be a Fed-driven bubble, then?
So, if this record rally has you ready to rush out put more or your hard-earned savings into stocks, you should certainly proceed with caution.
You don't want to run out and dump a large portion of your money in the market tomorrow.
Sure, we could continue the upward trend, but if history is any indicator, every new high is usually followed by a pull back.
This usually happens as investors sell off some of their gains. It's not out of the picture to think the Dow and S&P 500 could see a 5% pull back in the coming weeks. But some analysts say that already happened in mid-April.
Nevertheless, it underlines why you can't try to time the market.
One of the best ways to avoid this is to create a diversified portfolio and to use dollar cost averaging.
Let's say you had $10,000 to invest. Dropping it all on one stock tomorrow at the open of the market would be foolish.
Instead, you might find four solid stocks or funds, then spread your money in them and buy them equally every month for the next four months.
You may miss out on some gains if the market continues to rise but you'll also minimize your risk of loss.