If you’re a long-term investor, or you plan to invest in the stock market for decades, there’s still a lot you can learn about the U.S. economy and where it might be heading from a few simple things. Here are five that can have a profound effect on your investing behavior.
Prediction is key — No matter how you slice it, the stock market’s future may look a lot like its past. The Dow Jones Industrial Average gained more than 20 percent last year for a second straight year, after a record 500-point loss one year earlier. But this year is following a familiar pattern. The average gain for 12 of the past 13 years has been above 20 percent — the other two exceptions were 2010, which saw a gain of about 7 percent, and 2016, when it ended up an astounding 43 percent higher. (It hasn’t happened yet in 2019.) Investors who’ve watched the Dow climb above the historical 18,000 mark are quick to point out that the ups and downs of a cyclical stock market tend to average out. They also often try to map out an expected return, like 5 percent per year for 10 years.
On the other hand, one- and two-year charts don’t always prove the stock market’s predictive powers. As Joseph Stiglitz, a Nobel prize-winning economist and former chairman of the International Monetary Fund, pointed out recently, the economy has historically suffered declines of about 5 percent from peak to trough three times since 1900 — a point to remember should stock prices again start falling precipitously.
New government policy always makes markets jittery — The passage of presidential candidate Donald Trump’s tax cuts and major spending increases has unnerved economists, who are hopeful that the increase in government spending will boost the U.S. economy. The risk is that excessive spending will create inflation and force the Federal Reserve to raise interest rates more than it otherwise would have. Economists and market strategists point out that the market is price-based, meaning prices increase whenever there’s more demand and supply, and decreased demand and supply.
Related: Key Questions As The Fed Gets Set To Raise Interest Rates
Similar price increases and decreases are always associated with the start of a new administration. Just a week after President Obama took office in 2009, the Dow Jones Industrial Average dropped $1.4 trillion in value, and it hadn’t seen a 2 percent gain until six months after Trump took office in January 2017. Market strategists also point out that, since Trump was elected, the S&P 500 Index has had increases of more than 4 percent six months after every presidential election since the Depression, despite changing administrations in both directions.
Related: Is History Helping or Hurting The Fed? The Federal Reserve recently held a two-day meeting, in which it considered whether to raise the interest rate from a benchmark near zero. A hike would become the third in a year, the first since 2015. Traders, who’ve been predicting a third increase next month, sent the S&P 500 up about 2 percent Tuesday to another record high. The trend of higher interest rates, in turn, is associated with higher borrowing costs on mortgages and other types of loans, which can crimp spending.
Stock prices are far below historical averages — U.S. stocks are up 65 percent since bottoming out during the financial crisis in early 2009. Stock prices are also far below their most recent peak, back in 2007, before the Dow Jones Industrial Average was held at that record price for more than a year. According to Charles Schwab, the S&P 500 Index closed Wednesday at 2652.48, 8.9 percent below its 2007 peak, or $3.5 trillion less than its all-time high of 3846.47.
Related: What Donald Trump Could Mean For Your Portfolio
What now? Growth rates are slowing, and banks are raising borrowing costs, but the Fed might be slow to raise interest rates further. The reality is, stock prices could fall with increasing interest rates, or even without rates going up, over the next 12 months. But if you decide to hold stocks for the long-term, there are other, less volatile ways to invest. Here are three:
Direct investments into domestic stocks in companies that aren’t global powerhouse companies such as Apple Inc. or Exxon Mobil Corp.
Invest in U.S. exchange-traded funds, such as those with mid-sized companies or smaller companies.
Invest in low-cost exchange-traded funds and index funds, such as the ProShares Russell 2000 ETF.
Take a break from the stock market and invest in conservative real estate, like apartment buildings or single-family homes, which could be buy-and-