Sunday, February 25, 2024

The Stock Market Is Booming – But Is It Too Good To Be True?

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Well folks, the stock market has been on an epic tear lately. The Dow, S&P 500 and Nasdaq have all been notching new record highs over the past couple months. Investors who got in at the right time are popping champagne and lighting cigars with $100 bills. But not everyone is convinced this party will last. Some skeptics think we could be in for another brutal hangover once this sugar rush wears off.

So what gives? Is it really safe to dive into stocks right now while they’re still flying high? Or are we due for another rude awakening when this rally runs out of steam? Let’s dive into the numbers and see what we can learn from history.

Every Party Must Come To An End…Or Does It?

It’s only natural to be suspicious of this epic run we’ve seen in 2023 so far. I mean just look at the carnage stocks went through last year. The S&P 500 plunged nearly 20% while the Nasdaq entered full-blown bear market territory with losses of over 33% in 2022.

After a beatdown like that, it’s fair to wonder if this rebound is the real deal or just another head fake on the way to new lows.

However, history provides an interesting perspective. While past performance never guarantees future returns, research shows the stock market’s long-term trajectory is overwhelmingly positive.

Analysts at Crestmont Research analyzed every 20-year rolling return for the S&P 500 going all the way back to 1900. They found that literally every single 20-year period ended with positive total returns.

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That means if you had invested a lump sum in a broad stock market index at any point in modern history, then sat on your hands for 20 years – you would have made money in the end…even if you initially bought right before a major crash.

Crazy, right?

The Roaring 20’s Repeat

Let’s make this more concrete with a (somewhat) recent example…

Imagine we teleported back to the start of 2009. The global financial system was collapsing, iconic Wall Street firms like Lehman Brothers and Bear Stearns had just vaporized, and the S&P 500 was caught in a death spiral that lopped off a stomach-churning 57% from its 2007 peak.

At the time, it felt like the world was ending for investors. And who could blame the Chicken Littles warning everyone to evacuate stocks immediately?

Yet for those brave enough to load up on stocks during these dark days, they were handsomely rewarded in short order. The market swiftly rebounded to rise over 35% in 2009, nearly doubling to 92% gains in 2010. Fast forward 10 years and we’re talking about total returns over 380% in that decade!

And folks who recently bought stocks near the pandemic lows in 2020 have enjoyed similar parabolic returns the past three years as well.

So while the short-term can often look ugly and unpredictable, history shows that staying invested in quality stocks for long periods is a winning formula.

Time In The Market Beats Timing The Market

At the end of the day, when investing in stocks it’s critical to focus on the long play rather than get distracted by all the short-term noise.

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Because as we just saw, precise market timing is incredibly tough even for professional investors. There will always be corrections, crashes and crises that convince us it’s not a good time to buy stocks. And if you wait on the sidelines for the perfect opportunity, you risk missing out on years of upside.

Meanwhile, just buying stocks consistently regardless of conditions and holding for long horizons has consistently paid off for generations of investors.

Now keep in mind, I’m not saying to go all-in on stocks with reckless abandon either. Having a balanced portfolio aligned to your risk tolerance and time horizon is always prudent. And continuous research is still required to invest in quality companies with real staying power.

But historically speaking, time in the markets trumps timing the markets more often than not. So while we may well be due for some turbulence in 2023, long-term investors can still thrive with a diversified portfolio focused on innovation leaders and rock-solid stalwarts.

Just Remember That Not All Stocks Are Created Equal

As we wrap up here, I also want to stress the importance of selective stock-picking even if you intend to hold long-term. Because not all companies have what it takes to deliver the type of generational returns discussed above.

When markets get choppy – especially in economic slowdowns – low-quality stocks with weak competitive advantages, poor leadership and bloated valuations tend to get crushed the hardest. Meanwhile, best-in-class innovators and stalwarts with distinct moats and strong financials typically bounce back in time.

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For example…

While speculative, unprofitable tech IPOs have mostly languished since 2021, old favorites like Apple, Microsoft and Google-parent Alphabet went on to hit new all-time highs this year after initially stumbling.

Blue chip darlings like Disney and McDonald’s also held up relatively well compared to speculative meme stocks.

So by focusing your portfolio on companies with healthy balance sheets, visionary leaders, and durable competitive edges that allow them to rapidly grow profits over time – you set yourself up to not just survive but thrive across market cycles.

The Bottom Line

If I had to sum it up in a sentence, here’s my take as we head into 2024:

While short-term pullbacks are very possible, historically investors have been rewarded by staying invested in quality, innovative companies over long periods rather than panicking at any sign of volatility.

So tune out the noise, do your due diligence, focus on market leaders, and keep some powder dry to take advantage if any panic selling emerges. That’s generally the recipe for investing success over decades rather than days or months.

Easier said than done of course! But by internalizing lessons from the past, we can help secure our financial futures in the years ahead.

Alright friends, that wraps up this edition! I tried to provide some historical context around today’s stock market while mixing in a more conversational tone. Please let me know if you have any other feedback or suggestions to improve. Wishing you much success with your investments in the new year!

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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