Since the recession in 2008, the Dow Jones Industrial Average has seen a total return of approximately 250%. This in itself is nothing to worry about and appears to be healthy market movement, but when looking at the stages of growth, concerns can arise. From mid 2009 to early 2016, the market was moving consistently at about 7 to 8 percent a year, but come 2016, the market started advancing in the range of 20-22 percent. This quick growth could be attributed to Trump’s election as he changed the tax plan and aided the return of large sums of capital, but there looks to be more going on than just politics. It is hard to pinpoint where the market’s weaknesses are since technology is still advancing, the unemployment rate is low, banking is becoming more efficient, and Americans continue to love financing everything in their lives. On the surface everything seems to point to continued prosperity, but should we be concerned that things seem too good?
Trump’s administration has made a major impact on the market. The idea of a Republican president with a focus on economic policy has brought optimism to the market. Due to Trump’s tax plan, corporations and individuals are being taxed less, and therefore can spend more. Companies will potentially be able to bring their dollars back into the United States which would be a big win for the economy. Large corporations such as Apple have upwards of 300 billion dollars which could be brought back to the U.S. economy. This influx of money will hopefully lead to increased spending and should have positive effects on the market. A problem Trump has brought to light are his potential metal tariffs. Limiting the import of steel from other nations could cause countries such as China to impose new tariffs on U.S. goods, which could cause a problem for our economy.
Volatility has been extremely low for years with random spikes such as what occurred in February and March. Low volatility has made many investors think that nothing can go wrong and can foster speculation. When we do get surprise bouts of volatility, like earlier this year, investors tend to overreact, but it is important since it keeps people honest. Some volatility reminds them not to get too complacent, but too much can cause fear and erosion of confidence.
Interest rates have started to rise after being historically low for a decade. The Federal Reserve is aware of the growth in the economy and speculation in the market, and is trying to combat it by increasing interest rates. Like 2008, debt has become a concern. Yet unlike 2008, the debt is not only in housing, but also in the car market. Auto loan delinquency rates are at an all time high, even worse than during the recession of 2008. This presents a problem as there are billions of dollars in auto debt which is not being paid off. Subprime lending is never a good thing, but the auto sector presents a major issue. Auto loans are easy to get unlike mortgages, therefore millions of Americans are able to buy expensive cars without paying off their loans. Higher rates could cause further stress to this market.
As stated above there are several concerns with the U.S. economy. Although on the surface everything may look great with high market returns, low unemployment rate, and a new tax plan, there are concerns under the surface such as subprime loans, rising interest rates, and potential tariffs which could have a negative effect on spending and the economy. These factors could come together to affect the way investors utilize their money. Fundamentals in the economy and the market remain positive, but low volatility has caused investors to become complacent. Given the move in the markets since 2008, investors should monitor the above concerns closely.