Mitch on the Markets

February 20th, 2024

As Stocks Surge, Are Investors Becoming Afraid Of Heights?

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Don’t Be Afraid of Heights

Despite some market volatility experienced over the past week, U.S. stocks – as measured by the S&P 500 – are hovering around all-time highs. As I write, the S&P 500 is up over 5% to start the year, and the index has recorded 10 all-time highs so far in 2024.

That makes investors worried.

It’s understandable why investors would get jittery here. Stocks’ powerful rally, going on four months now, gives the impression that share prices are getting too frothy—especially considering that interest rates are still high, inflation is still above target, many Americans don’t feel great about the economy, and the geopolitical outlook is one of uncertainty and instability. And yet stocks are surging?1

There’s another point to make, which I think influences investor sentiment, sometimes indirectly. And that is: bear markets and/or market crashes almost always start with ‘all-time highs.’

This setup can sometimes lead to two responses: 1) investors get out of stocks because of the ‘fear of heights’; or, 2) investors attempt to time the market top, often with the strategy to “buy the dip” later. I would strongly urge against both approaches.2

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The first reason, in my view, is that the predominant factor driving the sustained rally is better-than-expected economic and earnings growth, especially what we saw in Q4 2023 and in January data. With 67% of S&P 500 companies reporting Q4 earnings as of February 9, the blended earnings growth rate was 2.9%, with 75% of companies surprising to the upside. Positive earnings and upside surprises are happening despite the ongoing drag from the Energy and Materials sectors, and the stock market’s enthusiastic response mirrors what we saw in 2023.

The second reason is that historically, all-time highs tend to be followed by more all-time highs. And certainly, more new highs than we’ve seen so far in 2024.

During the 1990s, the S&P 500 recorded a new all-time high on 12% of all trading days. More recently, there have been two bear markets since 2020, and yet the stock market still reached a new all-time high on 11% of all trading days. It happens more often than many investors appreciate.

There’s also some data on one-, three-, and five-year returns following all-time highs that may surprise readers. A recent study compared one-, three-, and five-year S&P 500 returns when an investor bought the index on any day, versus buying at all-time highs. Here are the findings:

• Invest in the S&P 500 on any day between 1988 and August 2020, and your average cumulative forward returns would have been:
o 1-year: +11.7%
o 3-year: +39.1%
o 5-year: +71.4%

• Invest in the S&P 500 on days when the index reaches an all-time high, also between 1988 and August 2020, and your average cumulative forward returns would have been:
o 1-year: +14.6%
o 3-year: +50.4%
o 5-year: +78.9%

The data may be surprising but it’s also clear – average forward returns were better when an investor bought the S&P 500 at an all-time high. There’s a reason the data looks this way. It’s because bull markets generally do not reach all-time highs and then abruptly end. By definition, they continue to reach new all-time highs as a reflection of growth trendlines we see in the economy and within corporate earnings. There are exceptions when a bull market only achieves a handful of new all-time highs, like in 2007, but these are fairly rare.

Bottom Line for Investors

My long-term goal is to capture as much upside as the broad equity markets have to offer, and the most effective way to accomplish this goal is to invest alongside growing earnings and an expanding economy. In 2024, I believe we will get both – economic growth has outpaced expectations on the back of strong consumers and a strong labor market, and Zacks is forecasting a sturdy year for earnings growth, likely over 10% for the full year, in our view.

In the current environment, I can see how all-time highs might seem like a warning signal, particularly with growing optimism and high valuations in some key areas. But I would caution against seeing all-time highs as a rationale for trying to time a market top. After all, the stock market could very well rally +30% before experiencing a meaningful correction, deeming the strategy ineffective.

If you want to capture the economic and earnings growth 2024 is poised to deliver, then my advice would be to own stocks – not to buy and sell them based on predictions about market tops and potential corrections.

And if you’re looking for current market insights to make your investing decisions, I am offering all Mitch on the Market readers exclusive access to our Just-Released February 2024 Stock Market Outlook Report4, which contains some of our key forecasts to consider, such as:

• Zacks Rank S&P 500 sector picks
• Current asset allocation guidelines
• Zacks forecasts for the months ahead
• Zacks Rank industry tables
• Buy-side and sell-side consensus at a glance
• And much more!

If you have $500,000 or more to invest and want to learn more about our market forecasts for 2024, click on the link below to get your free report today!

Disclosure

1 A Wealth of Common Sense. February 8, 2024. https://awealthofcommonsense.com/2024/02/all-time-highs-usually-lead-to-more-all-time-highs-in-the-stock-market/

2 Wall Street Journal. February 11, 2024. https://www.wsj.com/finance/stocks/stock-prices-valuations-financial-advisers-35ced497?&mod=djemMoneyBeat_us

3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

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The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

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