Stocks Seem to Go Nowhere But Up. Is That Possible?

Some major investment banks, including Goldman Sachs, recently have made the case that a major upswing in the economy is baked in — and that’s good for stock prices.

Yet stocks have done pretty well since bottoming out, soon after the pandemic started. The decline from mid-February to late March 2020 was historic, yet all was forgotten by August and record valuations are set week in and week out.

Some of that is just the environment: Interest rates remain low, inflation is minimal and the market just keeps right on chugging.

Yet we’re also in a highly unusual moment. Demand has been suppressed for months due to the pandemic. The mass arrival of vaccines means people will start going back to their normal lives, eating out, shopping, traveling and so on.

It means millions of unemployed and underemployed will find work again, and they too will start to spend.

You can begin to see why Goldman thinks good news is ahead, and why even high stock prices today don’t preclude higher prices in the months to come.

The fact is, nobody knows where the market will be in six days or six months or six years. But the trend over long periods undeniably is higher.

There have been slow periods and, yes, we seem to experience surprising market crackups every so often. But companies don’t close just because the stock market sells off. They don’t go under because wary Americans spend less in a recession.

In fact, most companies have long histories of facing up to slowdowns and challenges. They nevertheless persevere for the most part.

We know from decades of data that bull markets years and bear markets last months. There are, on occasion, short-run bear markets within long-run bull markets. Yet companies, and investors, carry on.

Picking winners

Think of it this way: A company is nothing more than a method for turning $1 into $2 and, in some cases, $10. The only thing a company can do really wrong from an investor’s point of view is fail to consistently make money.

Some companies do fall behind. They tend to get bought by larger competitors or wither away over time. Investors sometimes try to pick which companies will win and which will lose, but picking isn’t necessary.

If you own all of the companies in an index, for instance, such as the S&P 500, you own the 500 largest companies in the United States. That list changes over time as companies come and go, but your holdings change automatically to reflect that.

And those companies, being large, tend to have staying power. Most are nimble enough to change when necessary in tough times. When times are good they often pay a dividend, adding to your total return.

Index investing is a way, in effect, to own the whole economy. In good times and bad, but owning nonetheless. Yes, the indices can decline, but if your time horizon is far enough away it’s not likely to matter.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.