Another great day in the paradise called the stock market! It looks like it was safe to go back into the water on Tuesday, with Wall Street looking like it’s on a five-day winning streak — post correction.

And the overnight rise in stock prices in the Big Apple should help our market here today but it’s time for three lessons from the fear and loathing of the past couple of weeks.

First, despite the trash talk from doomsday merchants, the stock market is not ready to crash and burn, yet.

Second, volatility is back. These five, great days for US stocks will eventually give way to some selling, which is normal for a market in the euphoric zone.

And third, the stock market is more important to normal people than many think.

Let’s take these three lessons in reverse order because it underlines how important my job is in explaining what’s going on with our stocks and, more importantly, our super.

This week we got to two important confidence readings. First we saw business confidence that rose from a downwardly-revised +9.6 points (previously: +11.1 points) to +11.8 points – the highest level in nine months. This came with the NAB’s business conditions reading, which was the fourth best monthly outcome on record, rising from +12.8 points to +18.9 points in January.

In contrast, the ANZ-Roy Morgan weekly survey of consumer confidence fell by 2.6% to a reading of 119.5, reversing its gains over the previous two weeks.

“Given the tumble that global and domestic equities took last week, it is unsurprising to see confidence falter,” said David Plank, ANZ’s head of Australian economics.

“In particular, views around current economic conditions fell sharply last week (down 6%), though they remain well above their long term average.” (Business Insider)

Meanwhile, the Westpac consumer sentiment reading, which was taken last week, fell 2.3% to 102.7 — down from January’s four-year high of 105.1.

This underlined how people, especially retirees, care about potential stock market crashes.

“Extensive media coverage of these developments would have unnerved respondents on two fronts – the impact on their own financial position and concerns for general global stability,” said Bill Evans, Westpac’s chief economist.

“These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%.”

Bill also pointed out that views towards family finances declined sharply from the previous month, while views towards the broader economy also fell. That’s a huge impact on normal people thrust upon them by the heady world of Wall Street and stock markets.

The second lesson is that the US stock market is in the euphoric zone. That’s when volatility — ups and especially downs — become more significant.

This five-year chart of the S&P 500 Index shows how US stocks have been ripping higher without any big slumps over most of 2016 and 2017. It’s time for smarties to test the US stock market as interest rates rise this year.

 

 

I often share this quote from Sir John Templeton but it’s worth remembering: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

You might be thinking: “Switzer thinks the market, being in the euphoric zone, will die soon” but you’d be wrong. We don't know how long a euphoric period is but it is a time when someone like me is always on the lookout for really worrying signs.

They’re coming but I don’t think they’re here yet but I do expect to see some significant slides and rises this year — it will be volatile.

Finally, this comeback of stocks into five-day winning streak tells me that this market is not ready to crash, despite what publicity-seeking ‘experts’ want to tell you now, when you’re at your most spooked.

Right now, the economic and US corporate profitability story is so good that it won’t pay to get too negative just yet. These are certainly more risky times. If you don’t want to lose capital, then you might start dumping stocks but I think it’s too early.

I invest for income and my stocks will deliver that even if their capital value drops. I’d like to avoid a significant capital loss but if I cop it, the income from my stocks will keep me relaxed until the stock market rebounds.

That’s the way I’ve designed my portfolio of stocks and it helps me sleep in these volatile times.