It is quite exciting to hear the Dow closed above 20,000 yesterday. But the following from the WSJ Wealth Adviser Daily Briefing email says a lot.
I don’t necessarily want to be pessimistic, but there is room for caution…
Britain is leaving the European Union, a protectionist is in the White House, the front-runner in France’s presidential election wants out of the euro. Yet paradoxically, investors have concluded the world is getting less risky, not more. The result: a hunger for shares that carried the Dow Jones Industrial Average over the 20000 mark Wednesday for the first time, writes WSJ’s Greg Ip.
It is hard to explain this with economic fundamentals. They have improved since Donald Trump’s improbable election victory in November, but not by much.What has changed is how investors assess the balance between upside and downside risks.
Their worries about Mr. Trump’s protectionism or European populists’ growing threat to the euro are outweighed by the pro-business tilt of Mr. Trump’s cabinet picks; the prospect of more infrastructure spending and lower taxes, especially on profits; better bank profits from rising bond yields and lower odds of more negative central-bank rates; and the boost to U.S. oil producers since the Organization of the Petroleum Exporting Countries and several other countries agreed to trim production to prop up prices.
Nonetheless, the market needs a reality check. The U.S. expansion is more than seven years old and retains little momentum from using up spare capacity from the recession. At 4.7%, the unemployment rate is at levels the Fed considers a fully employed workforce. Indeed, recessions usually happen with unemployment around or below 5%.