When Benjamin Franklin said, “An investment in knowledge pays the best interest,” he may have been anticipating the low to zero interest rates savers and investors have been contending with for years.
Now it seems that rates have finally begun to rise, and contrary to conventional wisdom, that won’t necessarily be bad news for stocks.
Since the end of January, the S&P 500 has returned a positive 7.1 percent, while the price of bonds has declined and the 10-year Treasury yield has risen 0.6 percent. Investors have been busy selling bonds in anticipation of the inevitable (and much-anticipated) hike by the Federal Reserve Board while economists and pundits handicap the date of the upcoming rate increase. June? September? 2016?
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The age-old maxim —”sell in May and go away,” is often quoted by traders as a sure-fire strategy. And, for seemingly good reason.
According to Yardeni Research, since 1928, the S&P 500 has risen an average of 1.9 percent from May to October but an impressive 5.2 percent from November to April. Yet since the beginning of this bull run the old adage has not held true. If you had sold in May during this cycle you would have underperformed the overall market by a cumulative 70 percent. Since 1926, the stock market has generated positive annual returns more than 70 percent of the time, so it turns out that despite market tradition, being out of stocks is often riskier than remaining invested.
So what strategy should an investor follow—if exiting is either too risky, or at the very least, undesirable—when convinced that the market is becoming fully, or overvalued? One of my tried-and-true investment rules? Buy stocks like you buy toilet paper — focus on price and yield.
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I am asked frequently if stocks can continue to go up. Would that I knew. Bespoke Investment Group recently provided some insight as to where the current bull market ranks historically. Six years into it, this rally qualifies as the fourth-longest of the 33 Dow Jones industrial average bull markets since 1900.
Since the 2009 low, the Dow Jones industrial average has risen approximately 175 percent — the fifth-largest gain since 1900. That is a nice run, but Bespoke also notes that in the 1990s bull market, the Dow rose 400 percent. All the more impressive since interest rates were a good deal higher then
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