Stock Market High Creates Challenges For Investors

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 fall.

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 stock bandwagon. 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:
  1. 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.
  2. 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.
  3. 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 personal savings. The retirement math only works if people save more to make up for lackluster returns.

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.