New stock market highs: is the upside potential worth the downside risk?

As of August 8, 2018, the S&P is at 2858, only 14 points (0.5%) away from its all-time high of 2872. The NASDAQ ended today at 7888, only 44 points (0.6%) from its all-time high of 7932. The DOW ended up at 25,584 today, a mere 1,032 points (3.9%) from its high of 26,616 on January 26, 2018. Even as individual investors withdraw funds from mutual funds ($57B in outflows), companies are using ever more of their own corporate cash to buyback their own shares (on pace to set a record $1 Trillion this year).

Meanwhile, strong headwinds are facing the economy, as President Trump fights an ever-increasing battle with China and other countries over trade and tariffs. After the US announced a 25% tariff on $16B of imports from China, China retaliated with a 25% tariff on $16B of US goods. This comes after tariffs announced on both sides of $34B of goods last month. In addition to these tariffs, there are the economic impact caused by these trade sanctions. Coke and Proctor & Gamble have announced price increases in their products that they are directly attributing to tariffs. Thus, the trade war is having an inflationary effect. Historically, inflation is not good for the stock market.

As an investor, you need to ask yourself the following question: am I convinced that the stock market momentum is still positive, and will it continue through the rest of the year? Restated in different terms: is the upside potential worth the downside risk? You need to convince yourself of the answer, one way or the other, and make your investment decisions accordingly. The time to act is now.

Profit, Loss, Risk, Stock Market

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