Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
At some point, I manage to shift most conversations toward my obsession with pets, and one of those hobbies is climbing.
I'm not very good at it. But I'm trying hard. I bring this up because one of the many reasons I'm not good at it is because I'm a scaredy-cat. Maneuvers like the big reach, a leap of faith to the next catch, or some fancy footwork seem a lot easier when you're half a meter off the ground rather than three meters high.
It's the same movements at the bottom of the wall, but at the top, it's much more difficult. (Those rocks, and ropes, aren't my thing.) Climbers better than me go ahead and execute the move anyway, safe in the knowledge that they'll either pull it out, or, if it comes to that, that soft mats will cushion the climb. He falls. However, I'll probably get out and go back down.
If that analogy isn't too torturous, I'd argue that investors are facing a similar challenge now. Stocks, especially in the US, are out of the running. This makes people nervous. “It's all one way,” said Joe Davis, global head of Vanguard's investment strategy group. “I worry about that. I worry when the market seems to be completely pricing in one scenario, whether it's good or bad. But he said investors need to 'stay invested.' Avoiding an asset class just because the big indexes are going up doesn't really make any sense.” .
Duncan Lamont, head of strategic research at Schroders, said in a recent blog that we should not be “afraid” to invest when stocks are at or near record levels. The S&P 500 hit an all-time high in mid-December and has since gained an additional 7.5 percent. This “made many investors nervous about the potential for a decline,” Lamont wrote. This, in turn, prevents investors from withdrawing money from their rainy day funds in cash and putting it into stocks. History suggests that it should not.
Lamont estimates that US stocks have been at a record high in 30 percent of the 1,176 months since 1926. If anything, the market performed slightly better in the 12 months after a record high, resulting in a 10.3 percent rise. The inflation rate compared to 8.6 percent at other times.
The old saying that time in the market is what matters, not timing the market, is also an old saying. Resisting the temptation to jump out of stocks around the time of record highs yields meaningful benefits. If you switch to cash at those points, over 10 years you will lose 23 percent of your wealth, he says.
“There may be good reasons why you hate stocks,” he wrote. “But the market hitting all-time highs shouldn't be one of them.”
Even at this point, it's becoming difficult to justify not liking stocks. The late-February results from chip giant Nvidia were, in the words of one banker, a “mic drop moment” for the dwindling band of stock market bears. Investors have, quite reasonably, been openly wondering whether the 250 percent rise in this stock over the past year or so is the real deal or just bubble dust. But the company's results silenced doubters. It posted a staggering 265 percent increase in quarterly revenue, to $22.1 billion, exceeding even the rosy estimates of Wall Street analysts.
CEO Jensen Huang announced a “tipping point” in AI technology, and shares rose 17 percent, giving the company about $2 trillion in market capitalization.
Even before Nvidia's results, Goldman Sachs had already raised its target of where the S&P 500 would end the year to 5,200, after raising it to just 5,100 in December and initially pegging it at 4,700 just weeks ago. The index is now just over 5,000.
UBS is also encouraged by the fact that technology profits are catching up with rising stock valuations. “the [Nvidia] “The results come as a relief to AI bulls, as the outlook has improved significantly following a strong year-to-date rally in AI-related stocks,” Soletta Marcelli, chief investment officer for the Americas at UBS Wealth Management, wrote in a recent note. “Despite the 24 percent advance in the tech-heavy Nasdaq since late October of last year, we still see potential for further gains in technology stocks, especially those that stand to benefit from the AI revolution.”
It is difficult for investors to make the next jump in US stocks when they are already high. But the onus remains on the bears to explain what could push technology stocks lower. For many, a change in mindset may be needed.
Late last month, Michael Strobeck, global chief investment officer at Lombard Odier, said he had “substantially” increased his allocation to US stocks, adding that high valuations had not deterred him. He said: “There is an economic and geopolitical battle that has begun to accelerate between the major powers.” “I honestly believe that American technology is a geostrategic bulwark for the American economy to stay ahead of this fight.”
In a US election year, this may be a useful lens through which to view these stocks, even at their extremes. In fact, I never hurt myself properly when I fell off the wall.
katie.martin@ft.com
