US stocks continue to confront and overcome headwinds. Political antics, rising short term interest rates and geopolitical stress are all taken in stride. Declines have been brief and based upon the strength of the “bounce” following, and investors appear to be “buying the dip.”
I believe we are in a late-stage secular bull market that started in 2009. My primary frame of reference for this type of investing climate during my career is the 1998 to 2000 period when the NASDAQ rose roughly 58 percent over 19 months, culminating in the infamous tech bubble.
At that time, stocks were powered forward by the promise of the internet, which investors and consumers rightly assumed was going to change everything about American life. In the end, while the internet was transformative, investment logic and financial reason reasserted themselves and the bubble burst.
Now, when I say late-stage bull market, many of the investors I talk to think I’m expecting “the end” of the market cycle and suggesting getting out of stocks. What I am actually referring to, however, is the pattern that tends to create upside volatility (yes, volatility can be to the upside) and ultimately a disconnect between investment fundamentals, aka earnings, and stock prices.
My experience with the last late-stage bull market is that many pundits in the press will say “this time it’s different,” and cite exciting new technologies or other yet-to-emerge economic conditions to justify the market. As pure speculation I believe the transformative new technology could be Artificial Intelligence, or AI.
Already it seems like every day I’m waking up to new articles about AI and how it will transform everything from finance to medicine. I have to admit, the prospects for this technology are as exciting as anything I can imagine, and I can definitely envision the possibilities driving investors into a frenzy.
By historical metrics the US stock market is already a bit expensive. Does this mean it can’t go higher? Not at all — markets are prone to excesses on both sides of the spectrum, and I wouldn’t call current levels excessive yet.
Current levels, however, do present investors with certain challenges. To go “all in” with the stock market at current levels requires a bit more courage than I’m afraid I can muster, and yet at the same time, if markets do move into a late-stage bull market behavior pattern, I would hate to miss out on the potential gains ahead.
Understanding, of course, that no investment strategy can guarantee positive results, and losses are always a possibility, at times like these I think it helps to return to some fundamental investing concepts. For investors looking to put money into stocks, I would suggest dollar cost averaging, or buying in a specific pattern at regular intervals. This risk management technique is helpful in a volatile market, and could help guard against buying at a market top.
For investors already in stocks, the challenge could be making sure risk levels stay appropriate, even when a rising market makes risks seem diminished. The best tool in this regard is paying attention to overall asset allocation on a more frequent basis, which in a rising stock market should lead to systematic and regular gain harvesting, in effect selling high on a set schedule.