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  • Writer's pictureHigh Dividend Opportunities

Market Outlook: Proceed With Caution



Good morning Income Investors!


Those of you who live in areas that get snow are aware of a certain phenomenon that happens every year. The first time the roads get a bit icy, you can be driving along and you'll see a bunch of drivers stuck in the ditch. It doesn't seem to matter that many of these drivers might have years of experience driving on slippery winter roads, that first icing of the year always seems to catch many off guard and into the ditch they go. The summer habit of stepping on the brakes to slow down, or trying to drive too fast results in an embarrassing but usually injury-free accident.


The market isn't much different. Investors are always surprised by an economic slowdown. It doesn't matter if it has been easily projected, they are completely unprepared. They see the market going up, and they get FOMO. You have likely seen variations of this graphic depicting the Market Cycle.




While the real world isn't such neat waves, the core point is a good one. Investors tend to get irrationally exuberant right before a collapse. Investors are buying the most enthusiastically at the absolute top. They are the most motivated to sell at the absolute bottom. This is, in fact, a truism.


The prices of all stocks are determined by supply and demand. When prices are high, demand is higher than supply. When prices are low, supply (those wishing to sell) is higher than demand (those wishing to buy).


This is true of individual stocks, and it is true of the broader market indexes. There is a reasonably high probability that we see the market rally with exuberance. Falling interest rates provide a reason for investors to take money "off the sidelines" as many invested in short-term U.S. Treasuries or are taking advantage of the relatively high rates in money markets. As the incentive to put money in those areas declines, they will be more inclined to buy stocks, especially if the market is rallying and they catch FOMO.


As the economy weakens, this can be dangerous. It is time to use caution when choosing your investments. 

 

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