For some months now, steadily rising stock prices have felt out of step with our chaotic world. Each day brings new disasters and seemingly intractable problems: fires, floods and hurricanes, global warming, a surging pandemic, bitter political fighting, and humanitarian crises. And yet these events do not seem to weigh heavily on Wall Street. The market shrugs it off and stock prices continue to rise.
We have now surpassed seven consecutive months of positive stock market returns. The S&P 500 reached a significant milestone last month, rewarding investors who stayed in the game between March 23, 2020 and August 16, 2021 with a 100 percent gain. This was the fastest doubling of the index since World War II. It was also a remarkably smooth ride, with just one pullback of 5% or more.
The Federal Reserve's near-zero interest rate policy deserves most of the credit for driving the market’s spectacular performance. But the Fed is in a delicate situation. While painting a picture that the economy is healing and that "slow tapering" may be warranted, the Fed has also expressed caution about lifting interest rates too soon amid growing signs that the recovery may be starting to wane. All this is against a backdrop of worrisome inflation data.
Following red-hot Q2 corporate earnings, slower growth is now widely anticipated. The Conference Board projects 6 percent growth year-over-year in 2021, followed by 4 percent in 2022 and 3 percent in 2023. Goldman Sachs lowered its 2021 forecast from 6.4 percent to 6 percent in August, and recently lowered it again.
What lies behind us—17 months of remarkable stock gains—is also an unreliable predictor of the future. The market absorbs good and bad news second-by-second and can randomly change direction just as fast. We only need to look back to March 2020 to remember the shock of watching the global economy shut down virtually overnight. Those who panicked and sold equities have had 17 months to consider the consequences. Today we look at the situation from the other side of the fence, with some investors thinking, “The market has gone up so much, prices are cuckoo, it must be time for them to come down.”
The lessons are always the same: don’t let fear, greed, panic, or financial punditry color your investment decisions. Trust the markets and let them work for you over time. Don’t try to time them. Remain diversified and invested appropriately. Markets will rise and fall but the key to achieving your long-term investment goals is to maintain a long-term focus, even if it feels like not all is well with the world.
If you would like us to review your asset allocation or if you have other portfolio questions, please contact us. We are here to help.
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