So Far, So Good

Welcome to 2026, where news from the stock market has so far been pretty good.  The Dow Jones Industrial Average has appreciated by 4% so far this year.  It won't do that continuously, but 4% up beats 4% down.  Last year went well also for your stock investments.

To be sure, valuations in the stock market have grown very high.  By some measures (see Shiller P/E Ratio), valuations have moved almost to the levels which they reached just prior to the dot com crash.  The Shiller P/E ratio, created by the ultra-gloomy Professor Robert Shiller, who represents an additional data point that we should abolish the Nobel Prize in Economics, was specifically designed to make you nervous.  It compares current prices in the market with earlier, historical earnings.  Why do that?  I can't think of a reason.  Still, his preferences for index design aside, I don't think that Professor Shiller fudges his numbers, which currently show the stock market at its most expensive level since the year 2000.

I personally think that the market goes up for the following reasons:

• Inflation has remained steady in the mid-2% range.  Not bad.  Despite many forecasts to the contrary, the policies of the Trump Administration have so far had zero impact on inflation.

• Low inflation begets an expectation of still lower interest rates.  Since I wrote to you last on this subject, the Fed has cut interest rates three times.  They have room for another three, in my opinion.  Don't fight the Fed!  I don't think that the market will crash during a period of falling interest rates.  However, when we see a report of higher inflation, suggesting that we have run out of room to ease, and that the Fed may tighten policy, then all bets are off.

• Stock market earnings and real GDP have done great.  Average household incomes in our country now exceed $100,000 per year, and unemployment remains pretty low, though it ticked up after tens of thousands of software programmers got laid off.

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By the way, about those newly unemployed software engineers, who right now have a lot of time on their hands;  Nothing prevents any of them from starting their own software companies, using their expertise and the efficiencies of claude.ai to do so with very low capital.  I mean really low - almost zero.  I predict a boom in innovative software and a tremendous levelling of the racket known as "Software as a Service." The same principle holds true in many other industries.  People write about all of the jobs which we may lose to AI, but they need to think also of all of the new companies and the new jobs which we create.  I see every possibility that we create more jobs - and better ones - than we destroy, as we have always done in the past when a new technology renders old methods obsolete.

Photo by Donald Mattersdorff. All rights reserved.

So, the future looks pretty bright, in my opinion. Sometimes I hear that I'm a Pollyanna, dismissing bad news, and putting a naively positive spin on everything.  Well..., so be it.  Pollyanna was right.  By the end of that charming story, she has her entire town thinking and talking like she does.  With the caveat that it's volatile, and prone to emotional response, and sometimes crashes, no institution of modern life validates Pollyanna more strongly than the stock market, and the underlying economy upon which it is built.  May that long continue.