You would think that a rising market would make investors happy. But the higher it goes, and the longer this bull market persists, the more people seem to worry.
While the investment future is always uncertain, here are a few facts, as well as misconceptions about the market, that may help put investors’ minds at ease.
This bull market expansion is one of the longest. This is indeed the second longest expansion in recent history, born March 9, 2009, as the financial meltdown reached its bottom and reversed course. While there have been several pullbacks along the way, the overall trajectory has continued upwards. There’s a famous saying that “bull markets don’t die of old age,” they are killed by recessions or other excesses. No one sees that in the immediate future. Stronger company earnings, a business-friendly administration in D.C., and potentially lower taxes suggest the bull has more room to run. One reason this lengthy bull market is long in the tooth; its pace has been slower than the normal recovery due to the painful, prolonged and painstaking nature of the rebound from the Great Recession.
The market has never been this high. We’ve heard this one a lot, but simple historical observation would tell you this is true for almost every market or product. The stock market does move in cycles, but over time, and with inflation, all markets keep moving higher. Stocks, homes, automobiles, a postage stamp or gallon of milk – heck, almost everything! – are all priced higher than they were decades ago.
The market is over-priced. It’s probably fair to say that both stocks and bonds are pretty fully valued, with few apparent bargains. But valuations are forward-looking. They’re high because analysts see higher potential company earnings ahead and believe the market will grow into those valuations. Also, low rates on bonds can make stocks more attractive in comparison and distort traditional valuation metrics. Many analysts feel the expansion could easily continue another 24 to 36 months. But it is true that higher stock prices mean more risk, so make sure to keep your allocation in check and diversify by seeking out less fully-valued markets.
A bear market must be right around the corner. Keep in mind that pullbacks are a normal part of the investment process. A “correction,” or 10% or more decline, normally happens about once per year on average, usually in response to bad news or unexpected market developments. And simple math will tell you that an everyday 10% pullback now means a scary 2,000 point decline on the Dow.
Remember the sharp fall after the Brexit vote? Or how about last year’s “worst start to a New Year ever” when the markets tumbled more than 10% right out of the gate in January? (Those gloom and doom stories about “bad omens” really fanned the panic.) Remember that periodic declines are the norm, not the exception, and look at the silver lining. Pullbacks allow the market to catch its breath, reconsolidate, and get ready for the next leg upward. Think of it as one great opportunity to buy all your favorite investments on sale.