Too Far, Too Fast?
The S&P 500 index is now up over 30% since the “Christmas low” in December 2018.
It’s been a very strong run. The question many ask me is:
Have stocks gone up “too far, too fast” and are they in need of a break before moving higher?
That seems to be the takeaway from a CNBC article this week. In it the author notes how overbought the stock market has become during its recent run-up, which is true as you can see in this chart below:
The Dow, S&P 500 and Nasdaq have all notched new record highs in recent weeks. Naturally, that makes some investors nervous. But just remember, the most bullish thing stocks can do is keep moving higher.
That’s the definition of a bull market after all, isn’t it?
Several market strategists quoted in the CNBC article warned the S&P could easily pull back to around 3,050 before making further, sustained upward progress.
That might sound ominous to some, but in reality, it represents a tiny correction of only 1.5% from here. That’s just a rounding error for most experienced investors.
Here are two of the most important things to keep in mind about the stock market right now:
- We’re making new highs, which is the most bullish sign there is.
- We are now in the seasonal sweet spot for stocks in terms of historical performance.
Historically speaking, November and December are the best two months of the year for stock market performance. This is based on data going back many decades.
November–January is also the strongest three-month period of the year, and November–April is the strongest six-month period.
Whenever the stock market has risen 20% or more over the first 10 months of the year, as it has in 2019, November–December returns are even more consistently strong, up another 5% on average over the final two months of the year.
Bottom line: New highs AND seasonality are working in the market’s favor right now, so don’t overthink it.
Stay long on stocks. And if stocks do pull back 1.5%, or better yet, 5% or more, I’m a buyer.
How about you?
Here’s to growing your wealth,