Overnight Friday, Wall Street ended the week at record highs, the Dow notching its seventh consecutive record close.
It must be time to sell, right?
Surely these markets can't keep going higher and higher, can they?
After all, we've got an unpredictable President Trump, about whose administration The New York Times said…
"What America has seen so far is an inept White House led by a celebrity apprentice."
We're just one month into Trump's four year term. It already feels like an eternity. Just 47 months to go…
Still, the promises of a "phenomenal" tax plan and a $1 trillion dollar infrastructure spending program have Wall Street enamoured. Budget deficit be damned.
But as much as Trump quickly assumes all credit…
Source: Twitter
It's the improving US economy and strong corporate results — coupled with an accommodative Federal Reserve — that's driving markets forward.
So what's going to cause the stock market crash so many fear?
Not the prospect of higher US interest rates, something that previously sent markets into a spin. On the contrary, the market expects Janet Yellen to raise interest rates in March, with the prospect of more hikes this year.
As a reminder — and you do have to remind yourself of this — the Fed Funds rate today stands at the incredibly lowly target range of 0.50% to 0.75%.
Interest rates are likely to remain low for an extended period of time… the same as here in Australia, where the RBA's cash rate stands at just 1.5%.
What else might cause these markets to crash?
Stretched valuations? As witnessed by his recent spending splurge, Warren Buffett doesn't think the market is heading for a fall. He's been buying up big on airline stocks and Apple.
Hyperinflation? Debilitating deflation, leading to a depression to rival the 1930s? These are nothing but conspiracy theories peddled by those who prey on fear, and promote gold for a living. It's nothing but utter twaddle.
Soft corporate earnings? Unlikely in an improving economy.
Here in Australia, a house price crash? Sure, property prices are through the roof, affordability is at record lows, household debt is at record highs, rental yields are through the floor, the government is threatening to cut the capital gains tax discount for property investors, and the big banks are raising interest rates on investor loans.
But a full-blown house price crash? That will take some external force, like a full-blown recession.
Those waiting for the next Australian recession have already been waiting over a quarter of a century. And they are still waiting, all the time the share market slowly and steadily racks up the gains, and stocks keep paying out dividends, many of them fully franked.
Speaking of dividends, results today from NIB Holdings Limited (ASX: NIB) were nothing short of stunning, with underlying operating profit rising 43% and the health insurer raising its interim fully franked dividend by 48% to 8.5 cents per share.
The NIB share price has jumped almost 6% higher to $5, in the process hitting a new record high.
The contrast with Medibank Private Ltd (ASX: MPL) couldn't be starker. It raised its interim dividend by just 5% as the company battles high complaints volumes, rising costs and a decline in market share. The Medibank share price sits almost 20% below its all time high from June last year. So much for all the hype surrounding Medibank's IPO… you'd have been better off buying NIB Holdings shares.
Regular readers might remember back to when our recommendation of NIB Holdings made it to the home page of The Australian Financial Review…
Source: AFR
Back then — in March 2013 — the NIB share price was around $2.27. Including dividends, investors who followed our advice and bought NIB shares would be sitting on gains of over 150% since the original recommendation.
Research has consistently shown the pain people experience from loss is nearly twice as strong as the pleasure associated with an equivalent experience of gain.
The fear of that pain — referred to as loss aversion — is why many people sit on the sidelines even when they know stock market crashes are few and far between, and they know huge capital gains are on offer from ordinary shares like NIB Holdings, a company that also pays an attractive and rapidly growing fully franked dividend.
For pain relief, keep some cash on the sidelines. It will help you sleep well at night and give you the dry powder to buy some shares on the cheap should markets wobble.
But also do this…
Extend your investing time horizon. As an investor, time and patience are your two biggest advantages over the so-called experts.
Warren Buffett has used those exact same advantages to build himself a net worth of over $US75 billion… 99% of which was accumulated after his 50th birthday.
The average holding period for stocks has fallen to less than one year.
Extend that to three, five, ten and twenty years, and you can really benefit from the wonders of compounding returns.
Buy good companies. Hold them for an extended period, through the inevitable ups and downs of the market.
We recommended NIB Holdings almost 5 years ago. The first 150% gain might be just the beginning…
