As we delve into the current stock market scenario, it’s clear that something truly remarkable is unfolding. The S&P 500 has impressively surged by 22.33 percent this year, recently reaching a new nominal high of 1,745. Can you believe it?
There’s a unique charm to a sustained bull market that is unparalleled. The euphoric rise in stock prices can make anyone feel smarter, wealthier, and rejuvenated all at once. In such an atmosphere, it seems like anything is within reach.
During a bull market, one might feel that their bald spot is no longer growing, but rather shrinking, along with their waistline. Meanwhile, their 401k statements are no longer dwindling; they are flourishing, augmenting their confidence in their financial judgment.
Upon examining his monthly portfolio statement, he revels in the delightful surprise of his escalating wealth. He envisions his investment acumen rivaling that of Warren Buffett, or perhaps even surpassing it.
Undoubtedly, he attributes his good fortune to his skill and insight. Surely, it couldn’t be mere luck.
Navigating the Emotions of Fear and Greed
Indeed, this has been an exhilarating journey. The ongoing price increases have created a self-reinforcing cycle. With each day marked by positive developments, the prevailing expectation becomes that stocks will continue their upward trajectory.
While we’ve thoroughly enjoyed the benefits of rising stock prices, it’s crucial to exercise caution and restraint. Balancing our emotions of fear and greed is essential to avoid making hasty investment decisions.
For instance, we recently commemorated the 26th anniversary of the 1987 stock market crash, a day infamous for its record one-day decline. If you need a reminder, here’s a brief overview.
On October 19, 1987, the DOW plummeted by 22.6 percent. A similar drop today would result in a staggering 3,400-point decline in just one trading day, bringing the DOW down from approximately 15,400 to 12,000.
Yet, history shows that this crash presented an excellent buying opportunity. Stocks recovered within two years, and those brave enough to invest after the downturn reaped significant rewards. Unfortunately, many investors panicked and sold at the lowest point, missing out on the chance to buy when prices were favorable.
The lesson here is clear.
Investors tend to gravitate toward stocks when they are at peak values, as is the case today. However, the ideal moment to purchase stocks is not during record highs, but rather during bear market lows. Strangely, most people tend to avoid buying during those lows, often opting to sell instead.
How to Relish the Ascendancy of Stock Prices
There’s a captivating aroma wafting through the market as stocks reach unprecedented heights, lulling investors into fantasies of effortless wealth. Conversely, a foul odor often follows a market crash, compelling investors to flee from their holdings right when they should be buying in.
Interestingly, the psychology of investing diverges from that of other purchases. While individuals easily recognize a good deal on jeans or electronics, they frequently buy high and sell low in the stock market. The emotional tug of fear and greed often prevails.
Although stocks have already experienced significant gains, several indicators suggest this trend may continue. Firstly, the Federal Reserve is unlikely to taper its policies anytime soon, if at all. Secondly, as bond yields rise, even cautious investors will increasingly find themselves reallocating their portfolios towards stocks.
Also, the third-quarter earnings season has just begun. McDonald’s reported disappointing earnings, merely beating expectations by $0.01, but Netflix and Hasbro grabbed Wall Street’s attention, closing up 6.4 percent and 5.3 percent, respectively.
Nonetheless, earnings have taken a backseat this year, and concerns about jobs and the economy seem to be disregarded. Why start worrying now?
At this stage in the market’s upward trend, the relationship between price and earnings is of little concern. What holds significance is that prices are on the rise, bolstered by the support of the Federal Reserve.
In conclusion, even with the economy operating at a sluggish pace, the stock market is likely to maintain its upward trend. We cannot predict how long this will last or how aggressively it may shift when it eventually corrects. Consequently, holding some cash is a sensible strategy—not only for peace of mind but also to seize opportunities if stocks experience a sharp decline.
Sincerely,
MN Gordon
for Economic Prism
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