Don't look now, but stock market hype is making a comeback
November 01, 2010
The stock market just completed a second consecutive month of solid returns. More impressively, it has climbed by more than 50 percent since bottoming out in early 2009.
With this return to form by the stock market comes something less welcome -- a return to stock market hype. The subtext of every loud headline about stocks should be "buyer beware."
How can money market rates, etc., compete?
Against the background of a 50 percent gain in the market and predictions of new heights to come, it's tough for the world of money market rates and other deposit accounts to compete for attention. After all, average money market rates are down around 0.25 percent, and rates on savings accounts and short-term CDs are even lower. At best, you can add one to two percent by shopping for the best CD rates, money market rates, etc.
That's pretty tame stuff compared to predictions of a 'super boom' in stocks. That's what one breathless headline was calling for last week. Then again, stocks were all the rage at the end of the 1990s, and the market is still struggling to regain those levels. So perhaps it's worth a look behind the hype.
Hype equals salesmanship
The article on the 'super boom' in stocks predicted that the Dow would reach 38,000 by the year 2025. With the Dow now just over 11,000, that sounds pretty impressive, but when you do the math, it comes out to a compound annual gain of about 8.5 percent. Add in the dividend yield, which is just above 2 percent right now, and you'd more or less get to the stock market's historical average rate of return.
Do average returns constitute a 'super boom'? Only in the world of stock market hype. One word to the wise: whenever someone is trying that hard to sell you something, be very cautious about buying.
In contrast, bank interest rates may not offer much sizzle right now, but by coming to you without the hype, they also come without the risk.