{"id":7981,"date":"2021-01-11T10:23:59","date_gmt":"2021-01-11T15:23:59","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7981"},"modified":"2022-02-27T17:54:32","modified_gmt":"2022-02-27T17:54:32","slug":"are-we-at-the-top-of-this-market","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/are-we-at-the-top-of-this-market\/","title":{"rendered":"Are We at the Top of this Market?"},"content":{"rendered":"

The S&P 500, Dow Jones, and Nasdaq indices all finished 2020 at or near all-time highs.1 <\/sup>What\u2019s more, \u201crisk-on\u201d sentiment also ended the year with somewhat of a bang \u2013 investors borrowed a record $722.1 billion on margin through November 2020, and individual investors opened more than 10 million new brokerage accounts in 2020 (a record). The<\/em> Wall Street Journal <\/em>also reported that the online trading platform Robinhood, which targets millennials and younger investors, saw 500,000 downloads in December alone.<\/p>\n

In short, I think many investors are rushing into capital markets and taking-on excess risk in the process. Stories of 100+% gains, cryptocurrency rallies and huge gains in IPOs are all pushing optimism higher, which has historically been ominous for equity markets.2<\/sup> As optimism grows, I think we also move closer to the possibility of pullbacks and more frequent bouts of volatility.<\/p>\n

If you agree with me, your next thought may be to try and anticipate a market top. Longer-term investors may even argue that identifying market \u2018frothiness\u2019 could create an advantageous trade:\u00a0 by getting out of the market near the top, you can swoop in and \u201cbuy the dip\u201d later. While I agree in principle with this strategy, I don\u2019t think it is viable and, in fact, would urge investors to avoid trying it. Market timing rarely works, and over time it usually hurts total returns more than it helps.<\/p>\n

At the end of the day, no one can truly know when the stock market will shift into pullback or correction mode. I personally thought the stock market was due for some kind of pullback in Q4 2020, but it never happened. The market rallied, and our equity strategies at Zacks Investment Management were positioned to participate. I don\u2019t let gut feelings determine investment strategy.<\/p>\n

Long-time investors know that market corrections and bouts of volatility are normal and common, but we do not and cannot know when they will arrive or how long they will last. If anyone tells you \u2018with certainty\u2019 when market downside is coming and how long it will last, my advice is to run the other way.<\/p>\n

In the current environment, I fully agree areas of the market are frothy and the \u201crisk-on\u201d sentiment has me convinced we\u2019re due for a meaningful, -10% to -20% correction in 2021. But I would never try to predict when<\/em> the correction will arrive and what it\u2019s actual magnitude will be. If I tried, I\u2019m sure I\u2019d get it wrong. Almost everyone would.<\/p>\n

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 2021, I believe we will get both. Economic growth should be robust in the second half of the year, and we feel strongly that year-over-year earnings growth (particularly in value and cyclical categories) will pop coming off dreadful comparisons in 2020. Earnings estimates should continue to improve as the vaccine rolls out and as the fog of the pandemic clears.<\/p>\n

Growth will be uneven at first, and many corporations will still feel intense pressure in the first half of the year. With the market still reaching all-time highs anyway, many investors may be tempted to get out and to stand ready to buy the dip. I don\u2019t recommend it \u2013 remember, it\u2019s also the first full year of a new bull market, and based on what I see today, I do not want to risk being on the sidelines for any part of it. Trying to time the markets rarely works.<\/p>\n

Bottom Line for Investors <\/strong><\/p>\n

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 delivering the much-anticipated -10% correction, which would entirely defeat the purpose of buying the dip.<\/p>\n

If you want to capture the economic and earnings growth 2021 is poised to deliver, then my advice would be to own stocks<\/em> \u2013 not to buy and sell them based on predictions about market tops and corrections.<\/p>\n","protected":false},"excerpt":{"rendered":"

The S&P 500, Dow Jones, and Nasdaq indices all finished 2020 at or near all-time highs.1 What\u2019s more, \u201crisk-on\u201d sentiment […]<\/p>\n","protected":false},"author":3,"featured_media":7908,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7981","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7981","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7981"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7981\/revisions"}],"predecessor-version":[{"id":8688,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7981\/revisions\/8688"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7981"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7981"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7981"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}