New highs are getting so common that investors are disappointed when markets fail to achieve them at least weekly. That should tell you something about the future direction of stocks, at least in the short term.
As investors piled into stocks again this week in anticipation of unending spending by the federal government, it might be time to take a few profits. Don’t take that statement the wrong way. I am not calling for an end to this run-up in stocks. I think we could kiss the 4,000 level on the S&P 500 Index before we face a really big correction.
But that is only about a 3.5% move higher from here, something we could do between now and February if we get more good news out of Washington. That would be a good time to get a bit more defensive. Unfortunately, most investors will wait until markets go down before thinking of selling. It is all about that tussle between fear and greed.
Do you want to go with the flow, or do you want to make money? A gradual cashing in on some of those gains you have made will do two things. Number one, you get to book profits. No one ever went bankrupt booking profits. Possibly even more important, you start to build a little cash on your books, which you can then use to buy back stocks at cheaper prices. It also gives you the opportunity to adjust your portfolios. You may be overweight in large caps, for example, and want to have more exposure to small caps, or you may want to add to some investments that might outperform under a new White House administration.
Investor sentiment is wildly bullish. As such, there is no question in my mind that the stock markets have hit the exuberance stage, at least in the short-term. The anticipation of mega-trillions of dollars of additional stimulus spending, which is “right around the corner” will do that to you.
Despite all the good cheer, it would be a mistake to believe that the Biden Administration has the ability to right every wrong and to do so in record time. I do believe there is an urgency in passing a relief bill, followed by a stimulus bill, but Congress may feel otherwise. Several Republican Senators are already digging in their heals over the expected price tag of Biden’s package.
Much has been said about President Biden’s experience and relationships, especially in the U.S. Senate. I believe he will need that and more to forge compromises with his Republican counterparts, while keeping the progressive wing of the Democratic party in line. Yes, Biden can be applauded for getting right to work in taking executive actions in several areas that needed addressing, but that is not why the market keeps making record highs. Investors expect a quick passage of a $1.9 trillion relief package. As such, it is vulnerable to any cracks in that narrative.
My own expectations are that the final price tag will be lower than $1.9 trillion. It may also require more time than investors expect, so that a final passage could take until the end of February. The President’s infrastructure bill, assumed to be equal to or higher than his relief bill, might take even more time to affect a compromise, if it comes to fruition at all.
I know all of this might sound like a big downer, so color me a skeptic. By all means, continue to celebrate and profit from the market’s advances. But as you do, why not peel off a few investments along the way, just in case.