It’s been a long week.
In case you forgot, the S&P 500 closed at a record high on Tuesday, following one of the fiercest bear markets — and fastest rebounds — in history.
So, what happens next? It’s the million-dollar question these days, and there is quite the debate over the answer. In life, as in markets, there are always the optimists and the pessimists. Record highs can either be exciting or terrifying depending on how you look at them. And frankly, there’s plenty of evidence for both arguments.
Ultimately, we prefer to be realists by staying focused on our goals, not our emotions. But we’ll give you all the takes below.
The Optimistic Take
Record highs can be a major milestone. Things may still feel far from normal, but the market has successfully summited a mountain of worry.
Fortunately, momentum tends to be on the market’s side after reaching a new high. The S&P 500 has climbed in the six months after 75% of its record highs from 1950 to 2019.
We’re on the right track, too. This recovery has felt increasingly sturdy lately, even if the market has been stumbling around highs. Overall, more S&P 500 stocks are taking part in the move up these days, and value stocks are catching up to their growth counterparts. Wall Street still expects company earnings to rebound in 2021 — a key ingredient for more market gains.
Bull markets can be a powerful force. They can last for years or decades, as the last bull showed us. Despite a weak start to the 90s, the S&P 500 didn’t experience a closing drop of 20% or more throughout the 1990s, even though the world faced multiple wars, currency crises, and a U.S. presidential scandal. In the last bear market, the S&P 500 recovered its Great Financial Crisis (GFC) losses in March 2013, then soldiered on to seven more years of gains.
Coincidentally, these bull stretches overlapped with two of the longest economic expansions in history. Optimists also have the Federal Reserve on their sides keeping interest rates low and market support high. We’re likely past the worst part of the recession, and we could be on the cusp of another years-long period of growth if we can keep the economy afloat (with stimulus from the government) until we get a vaccine.
The Pessimistic Take
Sometimes, record highs can be a sign of something more ominous. The S&P 500 has never been higher than it is right now, and things don’t feel great.
Could this be the top? Have we gotten ahead of ourselves?
There’s definitely a case to be made. Stocks are facing another mountain of issues this fall, from the U.S. election and trade tensions, to the potential for another coronavirus surge. The economy, while growing, is still fragile. Some parts of the economy (like the job market) are in worse shape than they were during the GFC, and the government’s fiscal aid is gradually running out (with no concrete plans to extend). We’re not out of the woods yet, and history shows it could take a few years to get back to pre-COVID economic strength.
This record high has also felt a little shaky, and the biggest stocks still seem to be masking a weaker market. The size-weighted S&P 500 may be at record highs, but a separate gauge of equally weighted S&P 500 stocks is still 7% from its own high.
We’ve also seen some market meltdowns (or bear markets) begin soon after new peaks were reached. The most recent example was in May 2007, when the S&P 500 reached its first record high after the early 2000s tech bubble. After that, the index only managed to climb 2.5% higher in the following five months before it topped out in October 2007 (right before the GFC). Same thing happened in November 1980: The S&P 500 finally recovered from its 1973–1974 bear market, only to slide another 27% over the next two years.
We’ve been impressed by this market’s resilience, so we’d give the edge to the optimists as long the Fed stays committed to the cause and government support returns. Historical policy moves can fuel a charging bull, but we can’t guarantee the path forward will be as smooth as the past several weeks have been.
Either way, these days can bring up a lot of feels. Don’t let your emotions get to you, though. Take a deep breath, sit tight, and make decisions based on your own investing goals.
It can pay to be patient, too. Since 1950, the S&P 500 has climbed an average of 7.9% each year in the five years after a record high. All told, returns have been robust over longer time periods.
Bull or bear, we’ll be here to help you make sense of this new milestone — and whatever comes next.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.