Did you lose a lot of money in the 2008 stock market and real estate market crashes? If so you probably wish you had listened to that little voice in your head that said it was time to take profits and sit on cash for a while. It was not like there was no warning. Look at Google Finance and you can see how the SPDR S&P 500 ETF Trust peaked in late 2007! For the next twelve months the market was in an ever-steeper decline.
SPDR S&P 500 ETF Trust
Anyone who listened to that little voice and got out saved of money and had more to re-invest after the market bottomed out. Which brings us to the point of this article, should investors be scared as markets cool off today?
Every Rally Eventually Corrects
Whenever the markets in stocks, bonds or real estate get overpriced there is eventually a correction. Strong earnings have been keeping this one alive but so has the hope and expectation of substantial tax cuts. Most recently the stock market is off because the long hoped for tax relief may be longer in coming than expected. Reuters writes that global stocks fall on U.S. tax reform doubts.
Uncertainty over a U.S. tax reform deal pushed world stock markets further away from recent record highs on Monday.
There was caution as investors waited to see whether a U.S. tax deal would be hammered out soon. U.S. Senate Republicans have unveiled a new plan that differs from the House of Representatives’ version and there are few signs of a compromise.
“All eyes are on what the Senate and the House of Representatives will do on their tax bills,” said Nobuhiko Kuramochi, chief strategist at Mizuho Securities. “That there is debate is not surprising at all. Still, it is an uphill moment for markets.”
The immediate concern of the markets is whether we see US taxes cut next year, the year after or not at all. The concern for long term investors is whether or not tax cuts are such a good idea. We wrote about this in our article about Republicans, Economists and tax cuts.
As congressional action progresses so will the belief that tax cuts are in the wings. And thus the market may reignite and continue to go up. But eventually, what drives stock prices is the strength of the economy and one of the factors that drives or impedes the US economy is the cost of the nearly $18 Trillion US debt. In the end the issue comes down to who is right about tax cuts, the Republicans or the economists.
This is not an esoteric argument. Stock traders may make short term profits from the enthusiasm generated by the possibility of tax cuts. And short term investors may do well from stimulated business activity. But long term investors like the Warren Buffetts of the world are essentially betting on the US economy and too much debt will kill any benefits of tax cuts on economic growth and on stock prices. In short congress needs to get this right.
So, should investors be scared as markets cool off? The old saying is that you do not have a profit until you have taken a profit because any hot market be it real estate, stocks, gold or bitcoin can cool off in a hurry. Anyone with an eye toward a successful and secure future will hedge their bets at some point, diversify and hold a bit more cash.