Hi all,
As we approach Halloween, we find all three major U.S. equity markets at or near all-time highs. The S&P 500 has made almost 50 new daily all-time highs this year, and the lack of traditional periods of annual volatility have left cautious investors in the dust. But if you’re still sitting on cash or waiting for a better time to enter the markets, do not chase this market. We believe the opportunity for a better entry will come soon.
The stock market is currently pricing in more than a few rosy assumptions and to be perfectly honest, it’s possible they all work out like everyone thinks. In my experience, one of the dominoes tends to fall a little sideways and the market changes those assumptions very quickly. There is nothing more dangerous than a market that changes its mind.
Let’s check out a few of these assumptions.
- Bond spreads between investment grade and high-yield bonds are at their smallest margin since 2005. This means people have been buying the debt of riskier companies, under the assumption of little-to-no default risk.
2. This is the strongest Year-To-Date performance of the S&P 500 this century. While it’s true that strength begets strength, it’s rarely in this straight of a line.
3. Earnings expectations are pretty lofty. At these price levels, the market is expecting about 20% earnings growth over the next year. While it’s certainly possible, if companies were to fall short, the market could correct very quickly.
4. Investor Sentiment is frothy, but not yet crazy. CNN’s Fear and Greed Index just recently reached into Extreme Greed territory, and per Bespoke, the spread between Bulls and Bears are back to 2005 levels.
Generally, in times like these, it’s always better to be reactive rather than proactive, but I am willing to say with a high likelihood, if there are distributions from accounts that need to be made over the next 6-12 months, or you’re simply looking to get more conservative and lock in gains for 2024 as your wait out the results of the election, now is the time to trim a little off the top and reload the cash pile to prepare for the next, better opportunity.
– Adam