Why Does The Stock Market Keep Going Up?
Why does the stock market keep going up? We will give you two reasons why prices continue to increase. We will share three reasons it could reverse course. And we discuss what you can do to prepare yourself.
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Why Does the Stock Market Keep Going Up?
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The stock market keeps going up and a lot of people wonder why this is happening. We have two reasons.
Reasons for Optimism
The first reason that stocks continue to advance is the improved earnings outlook. So far 74% of the companies in the S&P 500 have reported their fourth-quarter earnings. About 82% of those have met or exceeded their profit expectations. This is good news for stocks. Standard and Poor’s is also projecting earnings for 2021 will be 68% higher than they were in 2020. That earnings estimate is also 10% higher than what it was at the end of 2019 when things were going very well.
The second reason stocks continue to march higher is strong economic growth. The Federal Reserve projects that the US economy will grow by 4.2% in 2021. Some economists estimate growth somewhere between 6% and 7%. This bodes well for the stock market. If the economy is growing, people buy more things. This means companies earn more money.
The Possible Pitfalls
There are some things that could interrupt this upward trend.
The first is a disruption to the vaccination process. Many hopes for the US recovery are pinned on people getting vaccinated. If there is a disruption to the supply chain or other issues, the stock market could react in a very negative way.
Rising Interest Rates
The Federal Reserve will not likely raise short-term interest rates. But we have already seen yields increasing in the bond markets. This means the cost of borrowing money increases and this can provide a drag on the economy.
Too Much Too Soon
Has the stock market moved too far, too fast? Stock prices can get ahead of themselves. When they do, there is often a setback to correct those things.
If you are five years or more from retirement, there should be few worries. But if you are closer to retirement, or already retired, proceed with caution.
Don’t Get Greedy Chasing Returns
Now is not a great time to increase your exposure to equities. We are at all-time highs and buying more at this point does not make a lot of sense. There may be better opportunities in the future.
Protect Your Income
If you are depending on your investments to produce income, review your allocation. Allocate enough to lower volatility assets to cover your income needs for a few years. Consider short-term bonds or cash for this. This strategy keeps you from having to sell stocks at an inopportune time if the market pulls back.
Expect A Pullback
The third thing you should do is prepare yourself mentally. Corrections are a normal part of the investing process. They happen, on average, once per year. And the average correction is about 14%. Seeing a pullback from where we are will not be a big surprise.
If you are concerned about how a stock market correction could impact your retirement, talk to a financial planner.
Talk to a Certified Financial Planner™ Professional
About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. He specializes in helping hard working, middle class families plan for retirement.