Markets are hitting all-time highs. What’s an investor to do?

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stock market is up

The past few weeks have seen one blockbuster economic report after another. From the 916,000 jobs that were added in March to retail sales jumping 9.8% month-over-month, these are some of the best economic numbers we could see in a lifetime. At the same time, much of this was anticipated, and there are still many Americans that are struggling. As the stock market continues to reach new highs seemingly every week, how should investors interpret these economic numbers and stay focused on the long run?

Here are three of the main forces at play

  1. The world is reopening. It’s important to distinguish between the natural recovery from last year’s lockdowns, the effects of government stimulus, and a sustainable acceleration in growth. Even if the economy were to simply return to pre-pandemic levels, economists would expect high growth numbers for a period as the world reopens. The fact that this has occurred swiftly is a nice surprise but hardly unusual.
  2. Government stimulus is boosting spending. The trillions of dollars that the government is infusing into the economy would reasonably be expected to boost overall spending by individual and businesses for a time. The latest jump in retail spending can be partially attributed to the timing of stimulus checks. However, without a further change in consumer and business attitudes, stimulus alone is not enough to sustain a long-term recovery.
  1. Investor expectations appear to remain high. These factors are important and their contribution to the early stages of the recovery cannot be overstated. However, the more important question today is whether there will be a change in individual and corporate expectations that causes growth to accelerate — beyond the initial bounce-back and one-off stimulus bills. As markets rise, this appears to be what some investors expect.

Chart: retail sales have jumped in recent months,
growing 9.8% in March from the month before,
and 27.7% compared to the previous year.

Chart, line chart

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Sources: Clearnomics, U.S. Census Bureau

Signs point to investor optimism remaining high — for now

If investor optimism exceeds what would be considered “pent-up demand,” a household might choose to buy a nicer car than planned, or splurge more on an international vacation. Businesses might anticipate this behavior and seek to invest in future growth today, further boosting capital expenditures, hiring and wages. Workers would then be able to spend more, so on and so forth.

It is still unclear if and when this will take shape. However, the stock market appears to be expecting this possibility. The market is not always correct, but when it is, it appears to be prescient in hindsight. This was the case when the market began to rebound last April even as most parts of the country were locked down for several more months.

As a result of the forces in play, it appears that the market is no longer just expecting a simple recovery but a continued acceleration in growth due to the economic reopening, government stimulus and excitement among consumers and businesses. 

Now more than ever, investors should remain balanced

While investors should continue to cheer positive economic news, it’s a good idea to remain balanced and disciplined as the stock market continues to reach new highs. After all, markets are subject to volatility and the upward momentum may not last. That means sticking with a long-term plan and not making changes or taking additional risk to chase gains based on headlines. 

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