Dear Garden State Trust Company:
Wow, the DJIA crossed 24000! No one told me to expect that when the year started. How much higher can the stock market go?
—Nervous Investor
Dear Nervous:
Monty Python famously said, “Nobody expects the Spanish Inquisition.” In much the same way, no one will ever predict a 20% rise in the stock market, even when they are optimistic. Surprises on the upside are pleasant ones, so prognosticators are happy to make such a mistake.
We can’t know how much farther this bull has to run, but at the moment the economic indicators are positive. Consumer spending jumped 0.9% in September, followed by a 0.3% rise in October. Gross Domestic Product grew 3.1% in the second quarter and 3.3% in the third. Most estimates for the fourth quarter are between 2.5% and 3.0%. New home sales in October reached a 10-year high, and consumer confidence is at a 17-year high, the highest in this century, according to the Conference Board.
These indicators suggest that this economic expansion has plenty of life left in it. On the other hand, it’s been a long time since the last stock market correction (a price drop of 10% or more), and market tops are impossible to predict. If inflation heats up, the Federal Reserve Board may act more aggressively to increase interest rates, and that action could, in turn, bring the rise in stock prices to an end.
Does that answer your question?
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