Despite plenty of ups and downs this year (including a nasty correction between late July and late October), 2023 has been rather fruitful for investors. The S&P 500 is up 14% since the end of 2022 and seemingly ready to end the year on a high note. It's quite a turnaround from last year's bear market.
But is the stock market actually on a firm-enough footing to keep chugging higher? The answer to the question largely depends on your timeframe and risk tolerances. Broadly speaking, though, yes, it's safe to step into new stock positions here.
The very question, however, ignores a much more important point.
Healthy enough, cheap enough
The backdrop could certainly be more bullish. Although inflation is slowing down, it's still elevated. Unemployment in the United States is surprisingly low, but creeping upward, while job growth is slowing down. The Federal Reserve's governors expect the country's gross domestic product (GDP) growth rate to slow from 2.1% this year to around 1.5% next year. That's just OK.
Now take a step back and look at the bigger picture. Corporate earnings are on the rise. Specifically, with nearly two-thirds of the third quarter's earnings reports now in hand, the S&P 500's Q3 profits are on pace to grow more than 10% year over year. Next quarter's earnings are expected to be up more than 10% year over year as well, with another round of record-breaking earnings in the cards for 2024.
Data source: Standard & Poor's. Chart by author.
The market's pretty reasonably priced too. The S&P 500's trailing-12-month price-to-earnings (P/E) ratio stands right around 20, while the forward-looking P/E is roughly 18. Stocks have been cheaper, but they've not been cheaper for very long, and they've not been meaningfully cheaper in quite some time.
Data source: Standard & Poor's. Chart by author.
In other words, you're paying a fair price for the average stock in the market.
Besides, the question of the market's safety in its current condition at its current price levels misses a key point about the entire matter. That is, for true long-term investors, such timing-related worries set the stage for subpar returns.
The biggest risk is missing out
That idea doesn't hold enough water for some investors. After all, a great deal of the financial media's time and resources are spent discussing -- and even predicting -- where the market is headed in the immediate future. There's also never any shortage of pundits willing to sell you their market-timing insights.
The fact is, however, most amateurs and professionals alike aren't going to be able to consistently identify the stock market's near-term highs and lows. Making this reality even more frustrating is that some of the market's very best days seemingly materialize out of nowhere. If you miss out on just a few of them, it can cost you a fortune's worth of missed opportunities.
Mutual fund outfit Hartford recently crunched the numbers, finding that of the S&P 500's 50 biggest daily gains between 1993 and 2022, more than half of them actually took place during a bear market. More than one-fourth of them unfurled during just the first two months of a new bull market when many investors would have likely been waiting on the sidelines for more convincing evidence that stocks were on the mend. Only 22% of the best 50 days for the market since 1993 are found in the remainder of bull markets, even though there are far more of these days than any other kind.
And the cost of missing out on even some of these days is catastrophic.
The numbers: Simply leaving $10,000 invested in an S&P 500 index fund during that 29-year time span would have grown to more than $158,000. Missing out on just the top 10 best days, however, would have dialed back this figure to less than $73,000. Not being in the market for the S&P 500's best 20 days would leave you with only a little less than $46,000.
You get the idea. Unless you've got a crystal ball (which you don't) and know exactly when the market's going to bolt higher, it's just best to get into the market and stay in it, even if it means taking a few lumps. The risk of missing out on unpredictable rallies is far greater than the upside of maybe avoiding a few ugly days.
Less is more
Don't misread the message: A handful of people will occasionally see and then avoid stock market trouble. It can happen. Don't be too impressed, though. Nobody does it very well for very long.
Rather, investors who focus on buying and holding quality stocks for the long haul without worrying about near-term dangers almost always fare better than more active investors; it just happens to be a bonus right now that valuations are fair while earnings are growing. That's all the more reason to stick with an existing portfolio of quality names or reload your portfolio with new quality picks if you're underinvested right now.
The added irony? Not only is worrying about the market's health at any given moment unproductive, it's also time-consuming. Investors who can trust their stocks even in more turbulent periods are able to spend more time on more personal and professional pursuits.
So, don't make investing more complicated than it needs to be by focusing on things that are unpredictable, or even unknowable.
