Can the Market Continue its Historic Rally?
The stock market has been on a tear this year, up more than 20% on average! While that’s impressive it oftentimes puts investors in an indecisive position. Should you sell your positions in anticipation of a pullback, or do you continue to invest in overvalued assets according to their book values? Answer this question correctly, and you can stand to make an enormous amount of money. Answer it incorrectly and your gains can take a massive nosedive. So can the market continue its rally? We’ll take a dive into some of the reasons it can, and some signs that a pullback is on its way.
What has the market done in the past year?
It’s been quite the bullish year for stocks, up more than 20% on average. Any fund manager would be quite happy with that result. Historically, the market returns around 7% annually, meaning the market is far outperforming its averages.
What’s even more impressive is the challenges that have faced the market this year. Trade, political pressures, and recession fears have been enormous bears on the market and yet it hasn’t slowed down.
What does history have to say about what comes next?
Many times whenever the market is up over 20%, investors assume a pullback is likely. It can come from anywhere. The trade war, presidential election, and many other factors could come in to play when it comes to the market.
Historically, however, whenever the S&P 500 is up 20% or more through October, the following year, and until the end of the year, also produces positive returns. In fact, the average return for the following year is 15% with only one year concluding in a negative return!
|Year||% Change the Following Year|
What to do if there is a pullback
If there is a pullback in the market, the last thing you want to do is sell your positions. Instead, use this opportunity to increase your positions and lower your overall cost per share. History shows the market will eventually revive itself, so it’s important to not get discouraged.
This is even truer if there are no fundamental changes in your stocks. For example, recently many stocks have been impacted by the trade war with China. Some stocks are impacted more than others, but even stocks that have little to no real impacts from trade, have pulled back. This is a good opportunity to get your stock “on-sale”. If the company you are invested in will not be impacted by tariffs or other trade factors, and no fundamentals have changed, buy buy buy.
If you do not want to invest more when a pullback occurs, hold your positions. Like we mentioned, this is never a good time to sell when a pullback occurs.
Our advice on trying to time the market
Don’t. It’s as simple as that. Trying to time the market correctly can oftentimes lead you down a path that is worse off than purchasing your positions without trying to time the market. As an investor, your goal is to evaluate a stock based on its financial performance, economic conditions, and geopolitical factors in order to determine if you believe the company will continue to grow. If you believe that the stock at its current price will continue to grow, then you should buy it. If you believe that the stock is overvalued, you could consider shorting it. If you are unsure of the future of the stock, you should not buy it.
Investors have been rewarded with 20%+ returns so far in 2019, and history shows that the market typically will extend those gains into 2020 and beyond, continuing its historic rally. With many pressures facing the market, it has outperformed its average by more than 10%. Many investors worry about the potential of a pullback after such significant gains and while there’s always a possibility, history is against it. If a pullback does occur, hold your current positions or consider investing more, lowering the average price of your current positions setting your portfolio up for even better gains.
Do you think the market will continue its rally? Tell us why or why not below and be sure to follow us on social media to stay informed with the latest in personal finance, investing, and more!