I'm feeling better after being terribly under the weather last week. Thanks for the well wishes in my absence. In any case, it doesn't seem as though I missed much.
In fact, the market's magical Trump run continues. We've now gone 40 days without a 1% intra-day move on the S&P 500 (NYSEARCA:SPY). New traders could be forgiven for thinking the market is an ATM machine at the moment. The majority of listed stocks go up almost each and every day. Whether you're buying defensive names or speculative, heavily shorted companies, they're going up regardless. Even foreign companies which long lagged the US market are starting to rip higher now.
Going into February, if you'd asked me, I would have said I'm cautious on the market, since things are generally overvalued. That's still true; nothing has fundamentally changed. Yet, the market continues to power higher.
It's a great reminder of why I stay almost fully invested in the market, even when things are expensive. As the cliche goes, time in the market beats timing the market. For investors engaged in market timing, it would have been tempting to get out of the market as early as 2014, after 2013's massive gains. Yet, despite minimal overall earnings growth since then, things still keep going up.
Bears have a much easier intellectual case to make here than the bulls. Looking at the chaotic nature of the beginning of Trump's presidency and the messy Fed rate hike cycle that awaits us, it's easy to get fixated on the possible downside.
Many people have done that, selling stocks and going to cash to wait for better prices. But here's a sobering fact: we'd have to drop 22.5% from today's S&P 500 level to get back to where we were just last January.
I published "The Bottom Is In. Now What?" last January as the market bounced off the 1,800 level. But that wasn't cheap enough for various readers, who made the following comments with the market then at 1,850:
"To call a bottom here is just irresponsible to your readers. You perma-bulls crack me up."
"I hate to disagree with you, respectfully, once again, but there is no way we have seen a bottom [...] I am near certain we see 1700 before we see 2200."
"The bottom is not in. According to many, a massive selloff could happen any time now. Some estimate another 10-15% decline, some say it will be worse than 2008."
"I can not believe the SA editors published this article."
I bring this up for several reasons. First, people who viewed the 1,800s as "too expensive" for the market last year would find the market wholly uninvestable this year. For investors who were on the sidelines, they missed a big year of returns and now need a 23% drop (more accounting for missed dividends) just to get in at the same price we were at last year.
And it reminds of the difficulty of market timing. Most of us enjoy trying to figure out what the market will do in the near term. Even if we don't trade on our guesses, it's an engaging mental challenge to try to figure out where the market will go.
But when we turn our predictions into dogmas, it can lead to real underperformance. The market, on average, tends to go up 8% or 9% a year. Thus, even a neutral outlook can be dangerous if you take a large cash position as part of that neutral view. Cash will underperform the market by nearly 8% per year (at current interest rates anyway), all else equal.
None of this is to say we should be investing aggressively here. It's a good time to be cautious. Even many stocks that were recently cheap (Mexican equities, select consumer staples) are starting to rip - there's not a whole lot of value out there. But that doesn't mean we should dump everything and sit in cash until the market tanks.
Particularly for younger investors, it's important to stay in the market. You can find plenty of good reasons to argue the market is overvalued here. And you wouldn't be wrong. But that doesn't mean the market immediately needs to enter a steep bear market to correct the current overvaluation.
I personally would prefer that the market corrects sometime soon. As a long-term, accumulation-stage investor, I prefer lower valuations to higher ones. And I particularly don't like markets that are unusually quiet, because they tend to end with people getting overconfident and causing excess volatility as the cycle turns. Put another way, I'd prefer to have regular 2011-style choppy trading environments rather than years of calm punctuated by the occasional disastrous 2001 or 2008.
But I'm not going to dump stocks simply because they keep going up. My public IMF portfolio is up 4.4% month to date for February. Going into the month, I would have said there was a decent chance it would lose money in February, given how strong the market has been lately - we're "overdue" for a dip. But I held on anyway.
If you sell every time we seem likely to head into a correction, it leads to all sorts of unnecessary mental stress. Do I get back in? How about now? For investors that were out of the market last year at the lows, you'd need a 23% drop just to get the same prices we were at last January. The math doesn't work out well for people who constantly trade out of their stocks trying to miss the next correction.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.