On March 5, the Dow Jones Industrial Average reached a new
record high. This might seem like cause for celebration, but it
actually just makes the investment environment even tougher.
The Dow's close at 14,253.77 broke the previous high close of
14,164 on October 9, 2007. In between these dates, of course,
investors have endured a harrowing ride. The financial crisis and
the Great Recession saw stocks lose half their value. As is always
the case during market panics, it was hard to envision the stock
market turning things around. It seemed as if prices were in a free
A shaky recovery
Given that history, why isn't it good news that blue-chip stocks
have now fully recovered? In some ways it is good news -- at least,
it's good for investors who stayed with stocks at the bottom,
though not for those who have only recently clambered back onto the
. Still, even for investors who have ridden stocks all the way back
up, this recent success creates new challenges.
Successful investors always have to focus on the next battle
rather than on past wins and losses, and looking ahead, here are
three difficulties that investors face:
The questionable support behind the stock rally.
With the stock market hitting new highs, you might expect the
economy to be firing on all cylinders, but
that's hardly the case
. There was virtually no economic growth in the fourth quarter of
2012, and the federal budget dilemma looks likely to put a damper
on 2013's growth. With the economy remaining sluggish,
unemployment has shown only sporadic improvement. Ultimately,
it's not enough for investors to be optimistic. Business owners
need to be optimistic enough about the conditions they see to
start hiring consistently, and the economy just can't seem to get
to that point.
The dearth of alternatives.
When stocks get a little pricey, investors should think about
transitioning into alternatives. Unfortunately, the options
aren't too attractive these days. With rates on most savings
accounts below 1 percent, there is little reward for staying on
the sidelines, and bond yields are almost as low, plus they come
with a risk of losses if interest rates rise. European stocks are
clouded by the long-running euro crisis. Prices on commodities
such as oil and gold are often inflated by speculation, and
developing economies are facing similar concerns.
The added pressure on personal savings.
With minimal rates on savings accounts and a stock market that
seems prone to cool off, the pressure comes back on
only works if people save more to make up for lackluster
Perhaps the best thing that can be said about the full recovery
of stock prices is that it indicates the financial system is more
stable now than it was in the dark days of 2008. That's good for
now, but the more prices continue to rise without fundamental
support, the more that stability will be threatened once again.