Reasons why the S&P500 will continue to rise - do you agree with the forecasts ?

Published by: 26.08.2021 10:40:42

Investors often make a lot of absurd arguments to justify their decisions. Particularly striking is the notion that the stock market may be  "ready" for a correction.

 

There is a lot of research that demonstrates the folly of market timing. It seems that it is generally easy to predict market movements, but often investors and analysts are wrong. 

After the remarkable problems associated with the COVID-19 pandemic, there are no certainties on Wall Street. So, before you brush the current earnings excitement off the table, we have plenty of reasons not to sell and expect the current rally to continue for stocks through the end of the year.

In case you missed it, the S&P 500 index just had its fastest doubling in history, having risen from a low of around 2240 on March 23 to around 4500 in August. It has also already set more than 50 closing records this year. This record-breaking momentum obviously can't last forever, but it's important not to associate this strong performance with the assumption that a correction is "around the corner." Generally speaking, stocks tend to move higher simply because they move higher - not suddenly drop out of thin air.

Earnings remain impressive - companies across the S&P 500 have beaten estimates by an average of more than 19% over the past five quarters. This has contributed to the interesting gains we've seen in stocks. Take technology firm Nvidia, which rose about 14% in a week, or sports retailer Dick's Sporting Goods, which surged 20% in a week after a positive report. 

Fed rate cut fears are fading: One argument some investors have had for 2021 is that the U.S. central bank is considering scaling back its stimulus efforts, which include, among other things, $120 billion worth of bond purchases by the central bank. However, most reports suggest that such a stimulus drawdown will not happen in the near future - perhaps in November at the earliest. This may sound like bad news for those more focused on monetary policy, but it is very good news for near-term market dynamics.

According to recent data, roughly 56% of analysts recommend buying S&P 500 stocks. That's the most since 2002. 

Housing & Inflation

Housing Market - The typical American doesn't have the majority of their wealth in stocks. Their home represents up to two-thirds of their total assets and as a result, their general perception of the economy and investment environment tends to be colored by real estate more than anything else. This is especially good news as home prices continue to rise; in July, average U.S. home prices increased an impressive 18.4% compared to a year earlier.

Inflation vs. food and energy: It's important to note that speculation about inflation risks in 2021 often doesn't tell the whole story. In July, the annual U.S. inflation rate remained at a 20-year high of 5.4%, but if you skip historically volatile food and energy prices, the "core" monthly inflation rate was just 0.3% in July - not just tepid, but below expectations of 0.4%.

It's also worth noting that there is little correlation between relatively high inflation and relatively low rates of return for U.S. stocks. Consider 2011, when headline inflation threatened to reach 4% (again mostly food and energy). That year the market was very volatile, but stocks held up. The S&P 500 index moved up several percentage points and gained nearly 15% the following year.

Summary

For most investors, however, it pays to ignore these trends and stick to a long-term plan. According to Goldman Sachs research, stock market returns have averaged 9.2% over the past 140 years. Of course, it may happen in the future that stocks don't gain value, but if you invest for the long term, the risk of losing value is almost negligible.