After a disappointing 2022, the market has had a strong recovery in 2023, with the S&P 500 index up about 15% this year. However, there has recently been a slight pullback from the rally, as the S&P 500 was up 20% this year at its peak.
So is this a buying opportunity for stocks, or is this the beginning of something worse? Let's find out.
There are always reasons to sell
While the market has had an excellent run, many themes may make investors concerned for the future. Take student loans, for example. In September, interest accrual will restart, and payments will kick back in October. Unfortunately, only 1% of borrowers continued to pay on their loan balance during the pause, so 99% will have to find the money in their budget to make these payments. That's a lot of money that won't go back into the economy to eat at restaurants, buy iPhones, or other things that the consumer has become accustomed to during the pause.
There's also the high interest rates set by the Federal Reserve, which are expected to stay elevated for some time. Until the Federal Reserve sees inflation fall to its 2% pace, this rate will likely stay high, which dampens economic activity by making loans more expensive to businesses and consumers alike.
Additionally, there's also the notion that the market has run up too far, too fast. Currently, the S&P 500's trailing price-to-earnings (P/E) ratio is 25.3. While that may not seem super expensive, it's the highest it has been during times that weren't drastically influenced by short-term events like the Great Recession in 2008 and 2009 or COVID-19 in 2020.
To top it off, famed investor Michael Burry (who gathered national attention after being a subject in the book and movie The Big Short) just bought put options (the type of option that makes money when an asset declines) controlling $1.6 billion in funds that profit if the market goes down.
Those are a lot of scary headlines, and you might be thinking of logging into your brokerage account to sell it all, but there is reason for optimism as well.
The market's long-term trend is up
Although these negative headlines dominate the news cycle, that's always the case. Rewind the clock one, five, or 10 years, and you can find multiple reasons to sell. And if you did, you may have avoided a short-term drop, but did you get back in the market in time to take advantage of the recoveries?
Timing the market consistently is something few investors can do. Just missing a handful of the best days in the market can screw up long-term returns. Hartford Funds found that if you missed the 10 best days in the market from 1993 to 2022, your performance dropped by 54%. If you missed the best 30 days, you're down by 83%. There were about 7,800 trading days during those 30 years, so if you were out of the market for just 0.4% of them, your returns were abysmal.
So if you're thinking of selling, don't. The long-term trend of the market is still up. An S&P 500 index fund like the SPDR S&P 500 ETF (SPY -1.68%) is a great way to invest in the broader market and should be a staple in nearly every portfolio because of its diversification.
Constantly investing in the market is critical, as you never know when there's a rally right around the corner. So even if the market was up 50% or down 50%, my answer would be the same: Keep investing.
