Don’t Be Euphoric Over Two Months Of Gains

Stocks are up big this year, and that means it’s time to be skeptical.

Warren Buffett says you should be greedy when others are fearful and fearful when others are greedy. That doesn’t mean stocks are ready to give up all their January and February gains immediately or even eventually. But it means the right psychological disposition to have is one of doubt and skepticism. If we get the decline, you’ll be ready for it. And being ready for declines, so that they don’t surprise you and cause you to sell, is the most important thing in investing.

Here are the numbers. Domestic and foreign stock are all up between 9% and 12% for the opening two months of the year. Mid-caps and small-caps are up even more, with the Russell 2000 up an eye-watering 17%. Junk bonds are up more than 6% and REITs are up more than 12%. Balanced indices are up between 7% and 8%, depending on whether they have foreign stocks or not.

It’s okay to be happy about this, but it’s also good to temper that happiness with some skepticism. Stocks don’t usually go up this much in two months. In fact, they don’t usually go up this much in a year. If you’re thinking that the current move is justified because of how much stocks declined in the last quarter of 2018, you still may be fooling yourself with too much optimism. Stocks have been up like gangbusters for the past decade. (Incidentally, if you panicked at the end of last year, and sold, you know how prone  you are to make moves at the exact wrong moment.)

None of this means you should run for the hills and sell all your stocks in a fit of contrarianism. But it means you should temper your expectations. (And trimming some gains might not be a bad idea. Rebalancing, especially in a tax-advantaged account is reasonable after a run like this.) It’s just as likely that stocks could drop from here as it is that they could tread water or keep going up. Nobody knows.

The end of last year is instructive about trying to time short-term moves. At the end of last year, longer-term moving averages indicated that there was more downside, while shorter-term moving averages indicated that the markets were “oversold,” and that a least a few days of upside were in the cards. It turned out that when things looked bleakest, on Christmas Eve or quickly thereafter, the market bottomed, and stocks have been off to the races ever since.

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Bruce Wilds 7 months ago Contributor's comment

Optimism that a new trade deal will occur between America and China has driven stock markets higher even as data continues to emerge confirming economies across the world continue to slow. It seems much of the current market fervor is based on optimism and hope falls into the category of "irrational exuberance" a term that Allen Greenspan has in the past used to describe unbridled enthusiasm. More on the realities being ignored in the following article.