The U.S. stock market set a new all-time high Tuesday when it surpassed a previous record from September. Think you missed all the Champagne celebrations? Spoiler alert: You didn’t.
Excitement for this new record is a bit tempered because investors were taken on a roller coaster ride the past seven months. The S&P 500 fell nearly 20% at its worst in late December, only to bounce back this year. For those investors who held on tight, their portfolio value (minus any new investments) is probably about where it was in the fall.
A new record high (or low) shouldn’t be a deciding factor of whether to buy or sell stocks, but milestones like these can be a good opportunity to do a portfolio checkup. Here’s why:
Wait, what’s behind the market’s record?
Behind the scenes of the market’s bumpy seven-month ride were some serious concerns that have since been squashed—for the most part.
Back in December, investors worried that another recession was imminent (those fears have since subsided), that the Federal Reserve might be too aggressive raising interest rates this year (central bankers now say they won’t raise rates this year), and that trade spats with China could derail the U.S. economy (there’s still no deal on this front).
Pushing the market over the finish line this week? Corporate America. Publicly traded companies are in the midst of the multiweek period known as earnings season when they disclose results, in this case, for the first quarter.
Earnings, or the measure of corporate profit, are important to investors because stock prices are based on these results—either what companies have reported happened or what they’re projecting for the future, says Jeff Carbone, managing partner for Cornerstone Wealth.
Results are in for about one-third of companies in the S&P 500, the benchmark index for the U.S. stock market, and they’re “less bad” than early estimates had indicated, says Tom Stringfellow, president and chief investment officer of Frost Investment Advisors. That may not sound great, but because “all the hot topics are cooling off,” he says, that’s made investors more optimistic about the market in general.
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Should I buy, sell, or do nothing?
It’s tempting to think you have this whole investing thing figured out, but even professional investors have trouble figuring out the right ways to invest when the market’s going up.
“We get greedy when we hear about these all-time highs,” Carbone says. That’s especially true after the S&P 500 has surged almost 25% since its December low—and many investors (rightly) assume it probably won’t be headed for another 25% four-month rally from here.
Even a professional investor like Stringfellow uses this type of market event to question his investment objectives.
“When you have market runs like this, you have to sit down and reevaluate your allocations,” he says.
The aim of that move, also known as rebalancing, is to manage your risk while producing returns that keep you moving toward your goals. Or as Carbone puts it: “Make sure you’re not going to have heart palpitations” the next time the market dips.
If your investments include individual stocks, now may be a good opportunity to consider selling some of your winning stocks and buying so-called defensive stocks—those that historically perform better during periods when the economy’s not doing so hot, Carbone says. After all, while the S&P 500’s hit a new high, that doesn’t mean share prices for all 500 companies in this index are at a peak.
And even if you anticipate some bumpiness ahead, continue adding money to the stock market if you’re investing for the long-term, like retirement. That way you can take advantage of what’s known as dollar-cost averaging, buying stocks at a variety of prices.
Where do we go from here?
Don’t be surprised if Tuesday’s record is surpassed again soon. Next week is another busy one for corporate earnings and if these results continue to be stronger than expected, that could push the market higher, Carbone says.
But that doesn’t mean it’s smooth sailing from here. Carbone says he wouldn’t be surprised to see a pullback ahead—especially after the market’s strong year-to-date rally. “But for long-term investors, this is the time you stay the course.”
April 25, 2019