Are we in a stock market bubble and should wait for a better time to invest?

By: |
March 31, 2021 10:44 AM

Data shows that economic activity, corporate earnings and other fundamentals are likely to continue to improve, and there are potential opportunities for long-term investors.

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Is a stock market bubble forming or just getting started, or is it about to burst? The answer to this may be much easier to comprehend in hindsight but not anytime before with full conviction.

That’s the nature of equity markets, being unpredictable, uncertain with several factors influencing its performance over the short to long term. Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, has made a brilliant attempt to get a grip on these questions that almost every investor is asking – Are stock valuations too high to allow for future returns? Could a correction be coming? And why do the markets seem so disconnected from the economy?

In a note published on the company website, Hyzy and Marci McGregor, senior investment strategist for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank, provides further insights on how investors can navigate current market conditions.

“While investor concerns are understandable, Hyzy believes, markets are not as “disconnected” as they may seem. In fact, the strong performance likely reflects massive government stimulus and market confidence in economic growth moving forward. “We believe we’re in the early stages of a new business cycle potentially spanning multiple years,” he adds. Though periodic volatility is inevitable, “our data shows that economic activity, corporate earnings and other fundamentals are likely to continue to improve, and we see potential opportunities for long-term investors.”

Should I consider waiting for a better time to invest?

“The phrase ‘all-time highs’ can discourage those who have cash they could be putting to work,” McGregor says. “Instead of investing, they wait for the perfect entry point.”

Yet while past performance doesn’t guarantee future results, history suggests little penalty for investing during elevated markets, McGregor notes. In fact, since 1871, buying into the market when it closed the year at all-time highs produced 15% returns, compared with 10% during other years.

Meanwhile, “staying on the sidelines can be costly,” she notes. During the 2010s, when S&P 500 returns totaled 190%, missing just the 10 best days of the entire decade would have reduced that return to 95%. One way to help mitigate the impact of price fluctuations when you invest is through dollar-cost averaging, which involves investing at regular intervals over time. This strategy helps investors acquire more shares when prices are lower, and fewer when prices are high.

With interest rates low and the U.S. and global economies now on the mend, “we maintain our preference for stocks over bonds,” McGregor says. While we believe stocks of large, dividend-paying U.S. corporations remain attractive, now may also be a good time to consider filling “gaps” in a portfolio. That could include smaller-cap and value stocks (stocks of companies with solid fundamentals that have historically underperformed), both of which are currently showing signs of promise, as well as international stocks.

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