Templeton’s first point—pessimism—is where I think the stock market and many investors are right now.
The powerful breakout in the Dow Jones Transportation Average and many blue chips on the stock market is very significant.
Pessimism regarding the stock market and the financial world is everywhere. But the U.S. stock market can advance in the face of poor unemployment, currency wars, budget sequestration, feeble banks, and massive monetary stimulus. It just proved that.
With just a little more certainty, the Dow Jones Industrials could easily jump another thousand points. There are continued low interest rates and extremely healthy balance sheets, plus tons of cash sitting on the sidelines.
Institutional investors are chomping at the bit to buy this market.
Buying in the Dow Jones Transportation Average and Dow Jones Industrials illustrates the jitters that big investors have. But that’s okay. Blue chip leadership is never bad. In fact, it’s always good.
The Dow Jones Transportation Average is off its high and is toying with its 50-day moving average (MA) right now. With the exception of the 2008/2009 stock market collapse, the Dow Jones Transportation Average has been flat for a number of years.
To me, its recent breakout and the participation from the rest of the stock market reveals the pent-up demand from institutional investors to put cash to work. With so much cash still sitting on the sidelines, there’s a lot of ammunition that could move this market much higher. The stock chart for the Dow Jones Transportation Average is featured below:
Chart courtesy of www.StockCharts.com
Of course, there will be more shocks. The situation in Europe is a mess; geopolitical risks from North Korea, Iran, and Syria are real; and economic statistics are atypical.
U.S. employment and labor participation are persistently weak. Inflation is prevalent and median inflation-adjusted U.S. household incomes have been trending lower since 2007.
But, the Dow Jones Industrials can still head upward in the face of these hardships due to corporate profitability, labor productivity, valuations, low interest rates, and strong balance sheets. (See “First-Quarter Earnings the Catalyst for Correction?”)
I view stocks as having been in a bear market since 2000 and this is their breakout. If this is the beginning of a secular bull market, there will be spectacular declines within it.
Personal financial control—your ability to protect your own money—is crucial. The stock market is and always will be a risky place.
Keep your cash in more than one institution, and keep it below the guaranteed amount. All eventualities are possible now.