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Eventually I manage to focus most of the conversation on my pet obsessions, which include climbing.
I'm not very good at it. But I'm trying really hard. I bring it up because one of the many reasons I'm not very good at this is because I'm a scaredy cat. Maneuvers like a long reach, a leap of faith to the next hold, or fancy footwork seem much easier when you're half a meter off the ground rather than three meters up.
It's the same moves at the bottom of the wall, but it feels much harder at the top. (That's bouldering; ropes aren't my thing.) Better climbers than me just go ahead and do the move anyway, confident that they'll either make it or, when push comes to shove, the soft mats will cushion the fall. However, it's much more likely that I'll bail out and climb back down.
Unless it's an overly tortured analogy, I would argue that investors are facing a similar challenge now. Stocks, especially in the US, are on the rise. And that makes people nervous. “It’s all one direction,” said Joe Davis, global head of the investment strategy group at Vanguard. “I'm worried about that. I worry when the market seems to fully price in a scenario, good or bad.” But investors need to “stay invested,” he said. Avoiding the asset class just because the major indices are soaring doesn't actually make much sense.
Duncan Lamont, head of strategic research at Schroders, said in a recent blog that we shouldn't be “afraid” to invest when stocks are at or close to record highs. The S&P 500 index reached an all-time high in mid-December and has continued to rise by 7.5 percent since then. This “has left many investors fearful of a possible decline,” Lamont wrote. This, in turn, discourages investors from withdrawing money from their distressed funds in cash and converting them into stocks. History suggests this should not be the case.
Lamont calculates that U.S. stocks reached record highs in 30 percent of the 1,176 months since 1926. If anything, the market did slightly better in the 12 months after hitting a record, returning 10.3 percent above inflation in the rest of the period, it was 8.6 percent.
The saying also applies that it is the time in the market that matters, not the timing of the market. Resisting the temptation to exit stocks at times of record highs has significant benefits. If you switch to cash at these times, you would lose 23 percent of your assets within ten years, he calculates.
“There may be valid reasons why you don't like stocks,” he wrote. “But the market at an all-time high shouldn’t be one of them.”
But even at this point, it is becoming increasingly difficult to justify aversion to stocks. Chip behemoth Nvidia's late February results were, in the words of one banker, a “mic drop moment” for the dwindling crowd of stock market bears. Investors have rightly openly questioned whether this stock's 250% rise over the last year or so is the real deal or just a pinch of bubble dust. But the company's results silenced the doubters. Quarterly sales rose a staggering 265 percent to a whopping $22.1 billion, surpassing even the rosy estimates of Wall Street analysts.
Chief Executive Officer Jensen Huang declared a “tipping point” in AI technology and shares rose 17 percent, giving the company a market capitalization of around $2 trillion.
Even before Nvidia's results, Goldman Sachs had raised its target for the end of the S&P 500 this year to 5,200, after raising it to 5,100 in December and initially setting it at 4,700 just weeks earlier. The index is now just over 5,000.
UBS is also encouraged by gains in the technology sector matching skyrocketing stock valuations. “The [Nvidia] The results are a relief for AI bulls as expectations have improved significantly following the strong rally in AI-related stocks since the start of the year,” Solita Marcelli, chief investment officer for the Americas at UBS Wealth Management, wrote in a recent note. “Despite a 24% rise in the tech-heavy Nasdaq since the end of October last year, we continue to see potential for further gains in technology stocks, particularly those that would benefit from the AI revolution.”
It's difficult for investors to make the next move in U.S. stocks when they're already so popular. But it's still up to the bears to articulate what can send tech stocks into decline. For many, a change in mindset may be required.
Late last month, Michael Strobaek, global chief investment officer at Lombard Odier, said he had increased his allocations to U.S. stocks “significantly,” adding that he was undeterred by high valuations. “A geopolitical economic struggle is beginning to intensify between the major powers,” he said. “Frankly, I view U.S. technology as a geostrategic bulwark for the U.S. economy to stay ahead in this fight.”
In a US election year, this could prove a useful lens to view these stocks even at their upper extremes. Anyway, I've never really hurt myself falling off a wall.
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