High Highs Have You Down?
What to do when you’ve missed the rally.
S&P 500, all-time highs. NASDAQ, crushing records. Bitcoin, shrugging the bear market like a shark surviving a hurricane. NVIDIA is tantalizingly close to unseating Apple as the S&P 500’s #2, behind Microsoft. Even select international markets, like Japan’s NIKKEI, are reaching
fresh all-time highs.
All this pump happening amidst a chaotic backdrop has more than a few scratching their heads. Isn’t a restrictive Federal Reserve supposed to cause a recession? What about war and rumors of more war? Federal deficits are exploding!
We continue to hear that Americans are struggling to make ends meet as inflation nips at the margins of household budgets. Yet, the market rallies. What a time to be an investor. Who called the anesthesiologist and told him to give everyone the good stuff?
If 2023 was a story of the Magnificent 7 carrying the S&P 500, the story so far in 2024 seems to be the Fantastic 4 carrying the Magnificent 7. It’s beginning to feel like we’re three quarters through a movie and three of the seven heroes are down for the count. The odds of success are starting to look grim.
Then, like in the Helm’s Deep battle scene from Lord of the Rings: The Two Towers, reinforcements arrive with the rising sun to decimate the dark army daring to challenge our idealistic future. Bearish market forces seem hopelessly outnumbered as the market rally broadens.
For the onlookers watching this battle from a distance, placing wagers on winners and losers, the odds would be 10 to 1 in favor of the orcs. No one expected this rally to overcome the odds and push to higher highs this effortlessly.
For their own good reasons, the onlookers stayed out of the fray. Probably out of fear of losing something they couldn’t afford to lose. It’s alarmingly easy to lose one’s head in financial markets if you don’t know what you’re doing. The sidelines do not look like a bad option for the less experienced without a bodyguard.
Now that most of the price action seems to be history, is now a good time for the cautious investor to step in? Possibly, but mute your expectations. In fact, be prepared for a counterattack. You may just be stepping onto the investment battlefield when potential danger is at its peak.
When you read headlines like ‘[stock X] is up 80% year to date”, you can’t help but feel a bit niffed that you didn’t see it coming. As if we can predict the future. So, the instinct is to pile into the momentum train and hope the thing doesn’t derail while we’re on it. Who knows, it could take us to the promised land!
This is a terrible strategy. Equivalent to playing the child’s game of hot potato with a live M80. It won’t kill you if you’re the unfortunate sap holding the exploding firework, but your pickleball game will never be the same.
As a retail investor, you will be playing this game against machines specifically designed to catch and toss this ‘hot potato’ with precision you are incapable of. Do yourself a favor and don’t spend money you cannot afford to lose on the momentum train ticket.
Chances are, if you didn’t like markets 12 months ago, you have less reason to like them today simply because they are more expensive. As I’ve stated before, we are bullish on equity markets and feel patient stock investors can be rewarded given the right temperament and allocation.
That said, it would not surprise me to see some downside volatility in the months to come as the battlefield is reassessed and the corpses are delt with.
This could present a good opportunity for onlookers to feather capital into a sensible allocation. I stress the discerning use of diversification here. The temptation to plow capital into yesterday’s winners can usually be attributable to FOMO (fear of missing out).
Instead, rely on dollar cost averaging (DCA). This entails dividing the funds you want to put to work into tranches with pre-scheduled buys into a determined allocation. It’s a great way to remove emotion from the decision process, which can often interfere with long-term results.
Most importantly, any equity investment should be committed to with a long-term mindset (5+ years). If you need near-term liquidity or desire a determined outcome, such an investment would be speculation. In this case, it may be best to stick to spectator sports. FOMO has a lot more bark than bite anyway.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
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