Hope for the best, but prepare for the worst. This seems to be the sentiment in the markets lately, which at the moment represents an ironic yet rational dichotomy between bullishness and fear. It’s kind of like when the weather has been so good lately, and you feel like it might be time for a little rain.
Although markets are sitting at or near all-time highs, there are some looming concerns about potential threats in both the near- and far-term future.
The S&P 500 has gone over 200 straight trading days without recording a correction of more than 5%. What's more is that the Russell 2000 is up over 25% from pre-pandemic highs, the sluggish Dow is up 19%, and the Nasdaq, a whopping 37%.
This all seems like textbook market euphoria, and investors have certainly felt their share of ebullience over the last 18 months riding this ridiculous wave. But is it really sustainable?
If this is in fact a bubble (and no one knows that with any sort of certainty) then this definitely looks like stage 3 (euphoria) out of five, with the next two being profit-taking and panic. Let’s not panic quite yet though, but rather examine it objectively.
The movement of money can give us insights into what investors are thinking:
- When we see that the month of July drew in over $5b in cash to defensive sectors and funds in comparison to just $3.6b for the entire first half of 2021, that could definitely be indicative of investor sentiment.
- On the contrary, momentum-oriented ETFs saw outflows of over $850b in July alone, which essentially erased 77% of the prior $1.1b in cash that went into them in the previous 6 months. Conversely, value ETFs and smart-beta strategies also saw inflows rise noticeably in July.
What it all means
What we can see plainly is markets advancing to all-time highs, coupled with concerns about just how high it’s gotten, and how quickly it’s done so, despite the occasional and unprecedented threats to the economy.
When Socrates said “I know that I know nothing,” he was probably talking about the stock market. And indeed, the future is uncertain, and while it doesn't hurt to attempt to read the tea leaves every now and then, we should look to stay the course by investing prudently and consistently. As we've said time and again, timing the market is impossible—it's time in the market that matters.