Aug 24, 2018 4 min read

The stock market set a record this week. We broke the longest bull market since World War II. It is now more than 3,400 days since the market absorbed a 20 percent decline in value.

This bull started on March 9, 2009. There have been bumps along the way, but no 20 percent corrections.

The No. 1 reason the market went up was low interest rates. The Great Recession of 2008 made the Federal Reserve lower rates to near zero to try to stimulate the economy. The Fed also did several rounds of quantitative easing, when it would purchase nearly all of the government bonds to hold down interest rates. Stimulating the economy is one of the Fed’s major objectives.

The low-interest-rate environment helped the stock market grow in at least three ways. First, it made it cheaper for companies to buy equipment and expand – the intended outcome. It also made it cheaper for consumers to finance autos, houses, major appliances and other big purchases. Because of this increased demand, companies had to manufacture more.

The second reason the stock market went up was that investors did not have any other place to invest money because CD rates were so low and bond interest rates also plunged. People had to take on more risk if they wanted to beat inflation. The stock market is the world’s biggest auction. When there are more buyers than sellers, prices go up.

The third reason the stock market went up was that many companies borrowed money at low interest rates and used it to buy back shares of their own company. With fewer shares available and more buyers, the market went up. Since this bull market started, shares are up 300 percent.

It is important to remember this is not all new gain. The market crashed in 2008 and it took a number of years to recover those losses before we saw any new gains.

Not everyone has shared in this growth. Many people were scared when they endured two crashes in only eight years: the dot com crash in 2001 and the Great Recession in 2008. Because of this, they did not own stocks during this recovery.

It is important to remember that bull markets do not last forever. No one can time the market and predict when the next bear will begin. It will happen sometime.

This is why it is important to make sure your assets are properly allocated among investment sectors. They also must fit your risk tolerance. Risk tolerance measures how you would feel about different levels of gains and losses in the market.

The tax cuts passed in December are boosting the economy. So is less regulation. It remains to be seen whether economic growth is fast enough to overcome an increasing deficit. The market certainly is not cheap. There are concerns about what is happening in Washington. Tariffs could increase inflation.

If inflation explodes, the Fed will raise interest rates faster than the stock market is factoring in. Controlling inflation is the second job of the Fed. If low interest rates were the major reason for the markets explosion, what would high interest rates do? We know they will hurt bond values.

It is great to have a new record bull market. Do you know when the bull we just beat happened? It ended with the dot com crash. It took 12 years to fully recover your investment. That is why it was known as the “Lost Decade.” Make sure your investments are positioned correctly and don’t be greedy.

Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.