The Weekly (3/8)

Stock markets tend to rise gradually; recently they have soared. 

The U.S. stock market is up by more than 20% since the end of October and currently stands roughly 5% above the highs set back in January 2022. 

The rally isn’t exclusive to American markets, either. Europe’s equities set a new record for the first time in two years in late February, India has been enjoying a multi-year boom, and even Japan, an economy hurt by years of stagflation, exceeded the levels they last reached in 1989. 

Rightly so, we’ve been receiving lots of questions from clients recently wondering about the direction of markets from here. Should I be taking profits? Can the market continue its move higher? Is the recent exuberance rational?

The question of whether stocks are moving too high, too fast, is a growing part of this year’s investment narrative. 

It’s a fair concern given the tumultuous market environment investors have had to endure over the last several years. But the answer is, of course, nuanced.

The bulls might point to the strength of the underlying economy as reason to believe that markets can continue their move higher.  The Federal Reserve Bank of Atlanta suggests that the annualized economic growth for the first quarter of the year should stand at an impressive 3.2%. 

The enthusiasm surrounding artificial intelligence has created a renewed energy in longer dated investments. Although pockets of the market might be viewed as over hyped, this time that hype is fueled by profits (h/t Nvidia). $17 billion of them in fact.

Typical signs of unhealthy excess aren’t flashing red either. For example, excess demand for IPOs hasn’t come back as the path to public markets is still in a standstill. Mergers and acquisitions activity is still slow. And the raw percentage of gains doesn’t suggest that stocks are overbought.

While the aforementioned is good news, it doesn’t remove the possibility of a pullback. 

The bears might mention the inverted yield curve as a reason to worry. Or that valuations—the multiple by which profits are scaled up—are inching back towards the highs of the late 1990s dotcom mania and the zero-interest rate run of 2021.

Similar extremes are also to be seen in other measures, including concentration (the share of the stock market that is made up by the top firms) which haven’t been this dramatic since the Great Depression.

Although we can point to data and historical trends in an effort to form a mosaic of today’s market environment, answers to client’s questions are very personal. 

In fact, it often comes down to your time horizon – if you were to believe that even the best investors can’t perfectly time the market, your time horizon is a meaningful way to inform your personal ability to bear market risk. There are vicious days when markets snap back and studies show that missing a handful of those can meaningfully impair long-term compounding.

Regardless of where we head from here, we are certain that this isn’t the last we’ve heard of the debate. Is this the top, or the beginnings of a new rally?

Have a great weekend,

– Your Titan team

Disclosures:

As of writing, NVDA is a holding in Titan's Flagship strategy.

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