At one point just a few weeks ago, the S&P 500 (^GSPC -0.46%) was up an impressive 9% for the year. Since then, the index has retreated and now is up a modest 3%, and many stocks are still selling off. Perhaps we're not at the beginning of a new bull market after all.
Don't let this year's tepid bullishness deter you from stepping into new long-term positions. We may have yet to see the bear market's ultimate bottom. To true buy-and-hold investors, though, it just doesn't matter.
No one ever sees it coming
It's interesting. A great deal of time and energy is devoted to analyzing the market's short-term -- and even daily -- gyrations. But being rooted in emotions and fickle perceptions, these near-term ebbs and flows are unpredictable. The market's longer-term trends, those rooted in economic factors, are much more predictable. Yet, investors rarely put economic information into its proper long-term perspective.
That's a big mistake, particularly right now. See, things are actually looking up for stocks despite the financial media's current prevailing rhetoric.
Image source: Getty Images.
Yes, inflation is still high, and yes, the Federal Reserve just raised interest rates again to levels not seen since 2007... when they were on the way down. Russia is still at war with Ukraine, while tensions in the Middle East are growing again. U.S. banks may be facing a liquidity crunch. China's status as an economic superpower is growing while that of the U.S. may be waning. All of these factors are potentially disruptive to a global economy that's still struggling to shake off the impact of the COVID-19 pandemic.
Here's the not-so-little detail all investors should bear in mind at this point in time against this backdrop: The market doesn't deliver any advance warning of a long-term rebound. Turnarounds simply take shape once enough investors unknowingly agree that the worst of any weakness is already priced in, and things are only poised to improve in the foreseeable future. You just have to be in the market at the time of that click to benefit from the usually strong start to new bull markets.
This reality admittedly doesn't make it a whole lot easier to open new positions right now. As was already noted, the current headlines paint a gloomy picture.
A couple of data points may flip this worry into optimistic bullishness, though.
A two-pronged bullish case for stocks
First and foremost, know that while the Fed just logged a rate hike for the ninth time in the past year, we may be nearing an end to the streak. The Federal Open Market Committee thinks inflation is being tamed enough to possibly only require one more hike this year before the underlying fed funds rate -- which influences interest rates throughout financial markets -- is dialed back next year and into 2025. With at least a little more certainty that interest rate increases are poised to level off and then perhaps even cool, investors can afford to think and trade more confidently.
And they've got good reason for this confidence. Data from investment management outfit BlackRock indicates that stocks rally an average of 17% during the first year following the end of a rate-hike cycle, and gain an average of 57% over the course of the first three years after interest rates peak; rates don't even necessarily have to come down for the broad market to go up.
The other data nugget that just might help you decide to get (or stay) invested lies in earnings themselves, and the broad market's subsequent valuations. In S&P Global's most recent forecast, companies in the S&P 500 are projected to earn $219.17 per share this year, up 11.3% from last year. The analysts are calling for 12.2% earnings growth to $245.99 per share next year.
That's impressive, presuming these companies can reach these profit targets. But it's not nearly as impressive as the fact that the S&P 500 is priced at only a little more than 18 times this year's estimated earnings, and just over 16 times next year's projected profits. That's as cheap as stocks have collectively been in a long while, suggesting that most of the market's potential problems are already reflected in share prices.
Safe to invest or not?
But the question remains... it is safe to invest in the stock market right now, as March is turning into April?
The answer depends on your definition of "safe."
The point was already made above -- the market's short-term twists and turns are practically impossible to predict. It's possible stocks could make a prolonged rally from here, convincingly putting an end to the bear market. It's also possible stocks still have new lows to dish out to investors before all is said and done. Again, we just don't know. If "safe" means your new positions never slip into an unrealized loss, though, there's certainly not enough safety to suit you at this time.
What we do know is, there's more reason to stay in or start tiptoeing back into long-term positions than there is to sell or steer clear of them whether or not there is more economics headline-driven downside in store. Brokerage firm Edward Jones' analysts explained in their most recent quarterly market outlook: "In our view, the pending economic downturn is well-anticipated, and equity markets have started to discount some of this outcome already. We see an opportunity for markets to recover more meaningfully in the back half of 2023, as inflation continues to moderate, the Fed pauses its interest rate-hiking campaign, and the economy potentially stabilizes."
Even so, we should already (or still) be looking for our next buy-and-hold picks right now. The bigger risk at this point isn't suffering more downside, but rather, missing out on the earliest stages of the next bull market.
