Ask the Rational Investor: Don’t fear missing out on the markets!
Over the last three months many stock market indices increased in value by close to 10% continuing strong market returns that investor’s experienced in 2023. The level of exuberance in the markets has risen to statistical levels that are cause for concern.
Outside of stock market sentiment the valuation levels of popular market indices such as the S&P 500 are at historical valuation levels that cause an investor to think twice about today’s stock market.
Much of the enthusiasm for the stock market has been companies directly or indirectly related to artificial intelligence. These stocks are often referred to as the magnificent 7 or the top 10 stocks in the S&P 500. Examining the concentration of these companies in the indices reveals that these companies are much more expensive than the broader 490 companies in the S&P 500.
Another reason the markets are rising is that many economists in January of 2023 thought the U.S. economy would be in a recession by now and interest rates would have been reduced. American economic growth has surprised to the upside consistently and it looks like this trend will continue.
Stronger than expected growth has resulted in inflation remaining stickier than expected.
Investor expectations keep changing about how much and the pace of a reduction in interest rates by the Federal Reserve. Markets are now wondering if interest rates will get cut at all in 2024!
Investors need to remain stubbornly focused on the long-term and not get caught up in today’s hype. Markets have done very well and it’s possible that the stock component of your asset allocation needs trimming.
Given the high degree of concentration in the S&P 500 investors should consider shifting out of passively managed products and into actively managed products. Actively managed products will likely do better in a higher valuation environment.
Markets like to go up and the long-term trend will continue, but there will be bumps along the way and the historical signals of an expensive market are currently flashing yellow.
Sources: Goldman Sachs
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.