The S&P 500, the broadest of the major stock indices, hit an all-time high yesterday, trading above 5300 for the first time in its history, and the early indications this morning as I write this are for a day of consolidation above that important level. That seems significant, and is certainly garnering a lot of headlines, but what, if anything, does it mean for investors?
There are two common ways of looking at a record high. Either we are in a strong bull market and further gains are coming, or the market is way too elevated, and a summer swoon is inevitable. Which of those views you take is probably dependent on a couple of things.
The first is your attitude to life in general. Optimists will favor the bull case, while those with a more pessimistic world view will be more scared than encouraged by current levels. And for a lot of people, their view will be colored by their politics: Democrats may see market strength as evidence of a strong economy that is benefitting everybody, so will anticipate further gains, while Republicans may see it as a sign of a world gone crazy, where unnecessary and excessive federal spending is fueling unsustainable gains, and stocks as a bubble that is about to burst.
However, if you see the new highs as an opportunity to reassess your investments, you should be aware of those influences and do your best to discount them. Emotion and politics are two of the worst things to which to base investment decisions. Both lead one to an extreme, binary, all-or-nothing view of the market when, in reality, it is quite possible that several things true at the same time.
Stock valuations are high but can still go higher. On the other hand, at some point, we will no doubt see a pullback. Meanwhile it could be that the economy is strong, but at least part of that strength is down to government spending. One could argue that that spending, and the borrowing that fuels it, is a good thing. It has promoted growth and, with wages rising, that growth has benefited most Americans.
However, the federal debt will have to be addressed at some point, and the longer the spending and borrowing goes on, the more painful that addressing will be when it does eventually happen.
The thing to keep in mind if you are investing for your retirement or some other long-term goal, though, is that while all of those things are probably true, the x-factor, the thing we cannot know, is the timing. Does a 10% pullback matter if it comes after the market gains 15%? What will happen after that if the drop comes? Will stocks rebound quickly or get mired at low levels for some time? Will reducing the debt mean a period of harsh austerity, or will economic growth enable a more measured repayment plan? These are all legitimate questions and when you consider them all together, one plan of action for investors seems obvious:
Do nothing, or as close to nothing as your emotions will allow.
If you contribute to your investments regularly, continue contributing at the same rate, and don’t be tempted to sell in anticipation of a drop that may not come for months. Now that 5300 has been breached, the most likely scenario is that we now trade in a new, higher range, which means higher lows and higher highs for a while. Sit tight and let that be your friend.
The one thing to be aware of is that the gains to this point have not been evenly distributed, and recent earnings have demonstrated that. Walmart (WMT), a bellwether retail stock, had a good quarter, is investing in the future, and has a solid outlook, while leisurewear manufacturer and retailer Under Armor (UA) is going the other way, cutting back.
Caterpillar (CAT), considered an indicator of conditions in manufacturing generally, was cautious about the future, while Dell (DELL) is raising their capex levels to take advantage of the AI boom. It is clearly a stock picker’s market, so adjusting your portfolio to favor some individual stocks in solid companies in areas of growth over those that are facing headwinds may pay dividends.
That, though, is an essentially short-term strategy and for long-term investors, the most important thing with the market at record highs is to stay invested. The fact is that the economy has handled higher interest rates without really flinching so far and, until that changes, the market will continue to move higher. It may not be a smooth ride, but it never is, and there is no reason other than fear or political bias to make any big changes, record highs notwithstanding.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
