From one Peak to Another...
As the markets reach new highs almost every week, I am running out of adjectives to describe the optimism in the US stock markets.
Last week, the Nasdaq rose to another record intraday high, while the S&P 500 is just short of its peak. The Dow, however, was down from the previous week, and the volumes were also relatively low.
While many investors are keen to invest their savings, they are also skeptical about entering at the current price levels, thinking that it is better to wait than entering just before a crash!
But waiting on the sidelines is no fun either, as the money is sitting idle, exposed to inflation while the markets are growing from one peak to another—a classic double whammy of lost opportunity and wealth erosion.
And, the later you enter the markets, the higher the risk of losses, as you might end up buying just before the crash!
Also, FOMO, or the Fear of Missing Out, can creep in after extended periods of waiting, causing irrational exuberance and possibly leveraged investment to catch up on the missed opportunity.
Already the FOMO is quite evident when looking at the current investments in the market, as investors are chasing higher returns through leveraged ETFs and CFDs.
So the most crucial question now is, do market levels really matter?
A peek into the history of the S&P 500 reveals that since 1900 the index has been at all-time highs or within 5% of its earlier peak more than half of the time.
Since 2013 the S&P 500 has been at all-time highs or within 5.00% more than 90% of the time.
Going by this trend, will the S&P 500 continue reaching new highs in the future?
Well, it depends on three crucial aspects;
As long as the earnings are good, fundamentals are strong, and/or the outlook is positive, markets will continue to grow. So as an investor, you should consider these three aspects when looking to invest your savings instead of just the market price levels.
Of course, you must also consider your investment goals, horizon, and risk appetite when finalizing your asset allocation.
Moving on to Europe
European equities were almost flat or down last week, as the region faces another wave of Covid-19 infections. Some countries have reintroduced restrictions to curb the spread.
Moving further east to China and India
Below par earnings, revenue, and Outlook from Alibaba Group discouraged Chinese investors last week. The CSI 300 was flat, and the Shanghai Composite index edged up 0.50%.
Indian equities were down last week as the Foreign Institutional Investors(FII) continued to sell throughout October Rs 13,550 crore ($1.8 billion) and November as well.
Thanks to robust inflows from Domestic players, Sensex is hovering just below the 60000 mark and the Nifty around the 18000 mark.
As a stellar earnings season just ended, and the fundamentals are still holding firm, markets could grow further in 2021 and 2022.
However, it is pretty easy to become greedy or complacent during extended bull runs, which can cause substantial damage if the markets tip over.
It would be wise to be patient, stick to the fundamentals, trim excessive risks by booking profits on extended equity positions, and most importantly, stay away from leverage and speculation.
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