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The argument against pouring more money into stocks right now isn’t a bad one. We’re still technically in a bear market, after all, and a mixed midterm election result means the federal government probably won’t be passing any major legislation in the foreseeable future.
If your instincts are telling you it’s OK to keep buying, though, trust your instincts. Five years from now, the current weakness will be remembered as a great long-term entry point even if you don’t end up stepping in at the exact low.
Five reasons to keep on buying
It’s admittedly cliched to suggest “now” is a great time to get into the market or add to your existing portfolio; it seems there’s never a bad time for true long-term investors to add to their stock holdings.
Like most cliches, however, this one is prescient for all the right reasons.
One of these reasons is, you don’t know when and where the market is going to hit bottom and begin a new bull market. You just don’t want to miss the earliest part of a new bull market whenever it materializes. Research from brokerage firm Edward Jones indicates the S&P 500 (SNPINDEX: ^GSPC) has rallied an average of 25% in just the first three months of the past five bull markets. Similarly, mutual fund company Hartford says more than one-third of the stock market’s biggest daily gains take shape within the first couple of months of a new bull market.
Connect the dots. If your portfolio is suffering sizable unrealized losses, the smartest and lowest-risk way to ensure you recover is doing nothing other than continuing to hold the quality names you already own. Of course, given the data from Hartford and Edward Jones, it also makes good sense to add exposure to the market while it’s down.
Perhaps a bigger reason to consider buying stocks now despite the iffy backdrop is that things aren’t quite as uncertain as they might seem.
Yes, inflation is still agonizingly high. Overall consumer inflation rates continue to hover near the 8% mark within the United States, setting a tone — and pace — for the rest of the world. Even stripping out the impact of volatile food and gas prices, the average consumer’s costs are 7% higher than they were a year ago. It’s taking a toll, even if only a mental one.
At least the pace of price increases is set to cool. The International Monetary Fund foresees global inflation retreating to 6.5% next year, on to an even more palatable 4.1% in 2024. Numbers from the most recent New York Fed Survey of Consumer Expectations suggest U.S. consumers anticipate seeing at least partial price curbs. It should be just enough relief to prevent consumers from completely cinching up their purse strings.
At the same time, while this year has been a tough one for corporate profits, analysts are in agreement with companies’ still-bullish outlooks. The S&P 500 is expected to earn a record-breaking $230.10 per share next year, reversing this year’s slight earnings lull of only $204.17 per share. At that earnings projection, the index is currently priced at a forward-looking P/E ratio of only 16.5. That’s cheaper than the S&P 500 has been for any meaningful length of time in years, largely thanks to this year’s overly aggressive selling.
Data source: Standard & Poor’s. Chart by author.
Then there’s the bullish argument some investors just have a tough time believing. That is, the third year of any presidential term tends to be a bullish one, even when there’s political gridlock in Washington. Indeed, gridlock may prove beneficial for the market, since it means both parties are relatively powerless to prevent business from doing what business does. Research performed by U.S. Bank indicates the S&P 500 advances an average of 16.3% in the 12-month stretch immediately following a midterm election, more than doubling (and nearly tripling) the average non-midterm year’s gain. Bespoke Investment Group’s numbers say the index gains closer to 13% during the third year of a president’s four-year term; though Bespoke is also looking at more historical data, its number-crunching suggests there’s more than an 80% chance the market will make some sort of gain this coming year.
Or, here’s yet another bullish argument for continuing to invest in stocks: Hartford’s research reveals that while the average bear market drives the S&P 500 lower by 36% from peak to trough, the average bull market is good for a 114% gain. That gain more than makes any temporary setback worth the frustration.
Keep things in perspective
They’re all just numbers, of course; the market may defy statistical norms and valuation-based forces. Stocks may well have further to fall, and may continue to slide lower for far longer than currently seems likely.
We’re likely closer to a major bottom than not, though. And, in any case, the biggest risk to the buy-and-hold crowd remains missing out on long-term gains rather than taking a few short-term lumps. Be sure you’re keeping things in their proper perspective. More to the point, be sure you’re still putting money to work in the market even if it feels a bit uncomfortable to do so. This game isn’t a sprint. It’s a marathon.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
