Yes, It’s Getting Scary, But Just Go with It
I’ve been having lots of conversations lately with lots of investors (on the phone, by the way). And there’s something creeping into their optimism: doubt.
It’s understandable. Amidst the rampant bullishness that seems to be pervasive across all demographics of investors, from retirees and Baby Boomers, to Millennials, Gen Xers, even Gen Z, there are signs of that smack of bullishness reminiscent of 2007 or 1999, two years that preceded spectacular crashes.
Last week, a shortened trading week, saw more of the same – more record highs for benchmark indices, that is:
- The Dow rose 647 points on the week, closing Friday 2.2% higher on the week, after notching a new all-time high of 30,116.51 earlier in the week.
- The S&P 500 notched a new high too, and closed the week up 2.2%.
- The Nasdaq Composite, which had been lagging, made a new high too, ending the week 2.95% higher.
- And the Russell 2000, measuring stick of the “value” and “rotation” trades, also hit a record, ending the week up a stellar 3.9%.
Irrational exuberance? Yes, I’d say so.
Are things that good everywhere, in all sectors, in all industries, by all measures? No, I’d say not.
Buy the Dip
This doesn’t look or feel like the setup in 1999 or 2007. Could we maybe see a 1987-style short-term horrendous crash? Anything’s possible on that front. But while that one’s more of a possibility, it’s not coming up in my probability analysis.
The exuberance can be chalked up to four backstories, meaning what’s driving investor sentiment and driving capital into markets.
First, those old enough to remember the 1987, 2000, and 2008 crashes remember recovery after each was painful. But markets eventually recovered and investors who stayed in quality stocks, even in benchmark index tracking funds, made all their money back and then some. The long-term lesson there is the same long-term lesson that’s always held true, markets always go up.
Second, after the 2008 crash, starting in March 2009, investors who stayed in recovered everything eventually, but investors who bought more stock on every dip made out like bandits. That formed the buy-the-dip mentality, which still works, even better since the pandemic plunge.
Third, the pandemic plunge was met with buy-the-dip gusto, while prospects of a vaccine, or several vaccines, are driving optimism that we’ll get back to our normal lives, which justifies the rotation into beaten-up “value” stocks.
And last but certainly not least, there are more retail investors, younger investors and traders in the market now and they only know buy-the-dips, TINA (there is no alternative) to stocks, and FOMO (fear of missing out) as stocks go higher.
Just Go With It
Sure, there are lots of things to worry about. There always are.
Things like crazy amounts of debt all around the world. That “zombie” companies, 600 of the biggest 3,000 companies in the world, have interest coverage ratios of less than 1. That the pandemic is getting worse not better. That there could be side effects to vaccines, or they may not get distributed for months or quarters, or longer, and they may not get adopted by a skeptical public.
Other things too. Like no stimulus in the face of rising unemployment claims, and more closedowns and possibly lockdowns coming.
But investors are already willing to look beyond all the negatives and are putting their money to work.
The trend is up, it has been up, and it should remain up, not just because the trend is your friend, because the backstories driving capital into equities are themselves systemic.
And until some systemic breakdown manifests itself, just go with it.
In the meantime, there’s something that I want you to check out, if you haven’t already.
It’s my 2021 Investors Address – in less than 60 minutes, I’ll reveal the best and worst stocks that I see for the upcoming year.
You don’t have to sign up or buy anything; it’s all free, a full list of 50+ stocks that I think you should either go all-in on or drop like a ton of bricks. There’ll be no gray area, I’ll tell you only the best of the best and the worst of the worst.
I go through them all pretty quickly, so I created an exclusive notes sheet for you, which you can download here. It’s just two columns, one for stocks to buy, and one for stocks to avoid.