Is this a good time to invest in the stock market?

2020 was insane. The US election was surreal, the COVID pandemic raged out of control, and the stock market rose 21%. (On average, stocks go up 10% per year.)

This leads to the question that I’m asked all the time:

Is this a good time to invest or should I wait?

I offer a variation of the same answer every time:

  1. I don’t know.
  2. I never know.
  3. It’s a fool’s errand to time the market so you should invest in a manner appropriate to your circumstances.

I acknowledge that’s an unsatisfying response so I thought I’d give you the insights of someone smarter than I — Robert Shiller. He won the Economics Nobel prize for his contributions to understanding stock market price movements. He knows a thing or two about this.

On October 23, 2020, he wrote an article for the NY Times entitled, “People Fear a Market Crash More Than They Have in Years.” Note his liberal use of the conditional mood as he explained why he thought stock market valuations could be too high and we could be facing a stock market crash. He ended the piece with the following:

“…The market may be vulnerable to a change in mass psychology, one that might dampen this sense of adventure and bring on a crash.

It seems that investors should be advised to remain cautious in their U.S. stock market holdings. The potential rewards for being heavily committed to the market in the coming years need to be carefully balanced against the possible risks.

No one knows the future, but given the general lack of investor confidence amid a pandemic and political polarization, there is a chance that a negative, self-fulfilling prophecy will flourish. This highlights the importance of being well diversified in asset classes — including Treasury securities, which are safe — and not overexposed to U.S. equities now.”

The stock market went on a tear a week later.

On November 30th, he wrote an article for Project Syndicate entitled, “Making Sense of Sky-High Stock Prices.” He confidently explained why he thought current stock market valuations were justified (after soaring 12% since writing his prior cautionary piece).

“But a key takeaway of the ECY indicator [a new stock market valuation measure he created] is that it confirms the relative attractiveness of equities, particularly given a potentially protracted period of low interest rates. It may justify the FOMO narrative and go some way toward explaining the strong investor preference for equities since March.”

What’s my point (besides poking fun at someone who can take it)?

Any knucklehead can explain the past, but even Nobel prize winners can’t divine future short-term movements in the stock market. (As has been observed before, stock market forecasters make astrologers look good.)

It’s a pretty good bet that stocks will be higher in the long run and if that’s your relevant time horizon, then, yes, now is probably as good a time as any to invest.

Questions?  Get in touch

Not a subscriber?
Sign-up here: