Stock Market Bulls Are Running Again

Summer is here, and both the weather and the stock market are heating up. This month, one Wall Street Journal headline read, “Bye-Bye, Bear Market” because the Standard & Poor’s 500 stock index is up more than 23 percent from its low on Oct. 12, 2022. (A bull market begins when a stock index, such as the S&P 500, rises more than 20 percent from its latest low.)

Many say artificial intelligence is fueling the bull market and will soon be responsible for a huge boost in economic productivity. Supporting that theory: Apple and Nvidia, two leaders in AI, are driving much of the market’s return.

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Because stocks are rising again, our instincts generally tell us that it’s safe to invest in stocks, even though those same instincts are exactly what lead us to buy high and sell low. The financial services research company Morningstar says investors time the market poorly, which cost them an estimated 1.7 percent in returns every year the past decade.

Perhaps the bull market will continue. On the other hand, given the multiple possible storms on the horizon (inflation, more Fed rate hikes, recession, the Ukraine war, tensions with China), perhaps it won’t. The inescapable truth is that no one knows how the stock market will perform in the short run.

How to invest in this market

I tell people to invest in this market the exact same way as in any other market. That includes the start of the bull market in October 2022, or when stocks lost 35 percent in 33 days in early 2020. Pick an asset allocation — say, 60 percent stocks and 40 percent bonds — that meets your willingness and need to take risk, and stick with it no matter what.

That’s easy advice to give and hard advice to follow. I assure you that my strong instincts were to sell all of my stock funds in March 2020. Because plunging stock prices lowered my actual allocation to stocks from my 45 percent target, I had to buy more, which was gut-wrenching to say the least. Rebalancing to get back to target is simply said but hard to do.

If you follow this disciplined approach to investing, you now may need to lighten up on stocks to get back to your target asset allocation. I suspect few actually are this disciplined, so what you should do now depends on, in part, what you have done in the past.

Take a look at your investment statements from March 2020 or all of 2022. Did you sell during these bear markets to become more defensive? If so, then I suspect you will do so again during the next bear market. I’d be very cautious about getting back in now, even though stocks are still below the all-time high in early 2022.