It’s incredible to comprehend how much difference one year can make in the market.  A year ago, the doom and gloomers predicted a bear market and an economic recession. To the delight of investors, those predictions were way off the mark (they usually are), and markets rose significantly in 2023.

So, here we are beginning  the month of February, and markets are hitting all-time highs.

After all that’s occurred in the country, economy, and markets over the past four years, it’s hard to believe that I’m writing about markets hitting record highs.  Some investors are confused or puzzled, while others are jubilant.  The mix of emotions is probably running high.  I think indifference is the best feeling to elicit because it keeps investors focused on the big picture.

Markets hitting all-time highs indicate investors have positive views on the direction of the global economy and corporate profitability.  However, these days, investors may think more positively about declining inflation and how that will shape the Fed’s interest rate policy as 2024 progresses.  Lower inflation and interest rates are a tailwind to stocks and bonds.

It is essential to know that new highs offer very little information in and of themselves.  It is far more interesting to understand why markets are climbing.  For example, six to seven companies drive markets today, one of the narrowest advances ever.  These companies are producing superior results compared to others, and for them to keep growing, those exceptional results must continue.  If they do not, markets will most likely decline.  Fortunately, markets have a way of evening out the playing field as more companies participate in the advance.

Regardless of the recent narrowness of markets, the S&P 500 Index has hit 1,176 new highs since its 1957 inception.  That’s the equivalent of a new high every 14 days!  History suggests that investors should expect the market to climb to many new highs over their lifetimes, even if the path isn’t always straight, as the illustration shows.

What Should Investors Do Next

If you don’t adhere to a well-diversified investment strategy that includes more than just the S&P 500, the Magnificent 7, and NASDAQ stocks, your portfolio may not be hitting new highs.  It is not cause for alarm or a time to make changes to your portfolio.  You’ll have to dig a little deeper into the reasons why.  For example, foreign and emerging markets stocks, value stocks, small company stocks, and bonds are areas that are not hitting all-time highs.  Maybe it is an opportunity to consider adding them to your portfolio.

At Bloom, our investment team believes that focusing too heavily on one or two areas of the market adds unnecessary volatility and downside risk should those areas struggle at some point.  We are staunch believers in having a disciplined portfolio management process that helps us eliminate emotional distractions that can arise during jubilant markets (markets are climbing!  I don’t want to make any changes!)

Establishing a portfolio process that reduces exposure to areas that have done well (like U.S. large growth stocks) and adding to areas that haven’t done as well is hard for most investors.  However, it will be easier to rebalance to areas that haven’t performed well if you believe those areas will see better performance in the future.  Important caveat: Having a well-diversified portfolio means some asset classes may be out of sync periodically, but it doesn’t make them less appealing long term.  .

If you have difficulty making changes, whether markets are making new highs or lows, you are experiencing a common phenomenon–investment paralysis.  If you want to lessen the burden from it and have a more strategic approach, it may be an excellent time to seek professional guidance. The team at Bloom Advisors is always here to guide you or be a resource for people in your network.