The U.S. stock market's performance has surprised many this month, with the 3 biggest indexes showing the record values since the pre-Dotcom crash times. However, despite the successful stock market performance, an average investor is still more anxious than confident about the financial future.
On August 11, it was the first time since December 31, 1999 that the 3 major indexes, Dow Jones (INDEX: DIJA), Nasdaq Composite (NASDAQ: The NASDAQ OMX Group [NDAQ]) and S&P 500 (INDEX: S&P 500 index [US500]), have scored record highs on the same day. This is supposed to be an indicator of financial growth and success, right?
Well, it turns out the high-performing indexes do not necessarily indicate economic well-being of an ordinary investor. The missing ingredient in this equation, according to the expert Russ Koesterich, is the lack of consistent overall economic growth, expressed in the nominal GDP value that includes real growth plus inflation. As this parameter, just as the state of the American economy, is not showing record high values unlike the stock market indexes, it is definitely something to keep in mind.
The expert thinks that the Dow Jones, Nasdaq Composite and S&P 500 are at a fragile state right now, despite the record performance, and they can only enjoy steady positive results if combined with a faster economic growth.
"Today, productivity is at multi-year lows, demographics are working against growth and any further drop in inflation or rates would likely come in the context of deflation, not a supportive environment for stocks," wrote Russ Koesterich.
The Guardian's Suzanne McGee also believes that the latest records are more fragile than they might seem, as the corporate earnings performance has definitely not been on the rise. On the contrary, corporate earnings have been declining for 5 quarters in a row due to sluggish global economy that impedes sales growth in many industries, pushing companies to cut costs to make profits, reported Bloomberg. Yet again, the stock market hitting the all-time highs this month doesn't fit well in the bigger picture.
McGee believes that the tepid performance of the corporate sector only adds to the stock market's fragile state because the stock prices are traditionally traded as a multiple of corporate earnings. An ordinary investor relies more on the corporate compensations, such as salary, rather than the income from investments as compared to a professional investor. That's why they have been left in a very vulnerable state watching their companies cutting costs and optimizing workforce like Cisco announced only last week.
It is clear that this month's record high performance of the stock market hasn't changed much in the life of ordinary investors because they simply don't have enough funds to actually enjoy the rise as they are awaiting an economic growth of a bigger scale. So in order for them to make any profit from it, the investors need to be willing to allow more risks in their investment portfolio, if they have any, and "load up on stocks", which might be too much to ask for many of them.