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Home / Expert Opinion / Money Management: Getting perspective in this long bull market

Money Management: Getting perspective in this long bull market

George W. Karpus

The Dow Jones Industrial Average just made a new all-time high in early March and has achieved a 10-consecutive day ride into positive territory.  This is the first 10-day win streak for the Dow in over 16 years.

The media coverage has caused retail investors to begin to return to the stock market as is being confirmed by positive equity fund cash flows. If professional investors want to sell stocks that they own, they mark the prices up. If they want to buy stocks, they mark the prices down. Media coverage causes retail investors to come into markets near tops, and panic and sell near bottoms.

In the 10-consecutive day market rise, the DJIA only gained 3.5 percent. The small incremental daily increase supports this belief that insiders and pros are selling and retail investors are buying. Conversely, a sharp increase in market prices would indicate the opposite — that insiders and pros are the buyers.

No one can predict market tops or bottoms. Common sense tells us that we are closer to a top than a bottom. This bull market is over four years old and is up over 120 percent. Only 4 previous bull markets have been longer and only one third have been more powerful.

Unprecedented fiscal and monetary stimulus has been driving our markets. The federal government is still spending $1 trillion/year more than it collects in revenues. Further, the Federal Reserve is buying $85 billion/month in securities, which should create $1 trillion dollars in additional money. This cannot go on forever.

If the market senses a reduction to this stimulus is forthcoming, market sentiment could change dramatically, as the stock market is a leading indicator and discounts events 6 to 9 months out.

Three things should negatively impact stocks in the future:  1) Higher taxes will directly reduce corporate earnings. Since stock prices are a multiple of earnings, reduced earnings can only result in reduced stock prices; 2) a slowdown in deficit spending; and 3) a slowdown in printing money.

A prudent investor should have 8 percent to 10 percent off the table in stocks now, and be looking to take more off the table if the market continues its upward trend. By modestly underweighting equities, an investor can lock in gains, reduce downside risk, and build reserves so that they have the ability to purchase stocks should they become more attractive.

Back in 2007, we had the professional discipline to create reserves as the markets were then making new highs. These reserves were then re-deployed in 2008 at deeply discounted market prices. That is how, as the DJIA was just making new highs early this month, the overwhelming majority of our clients were already well ahead of where they were in 2007, and have been for quite some time.

George W. Karpus is chief investment strategist and chairman of the board of Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.