Is the Market Rallying Too Fast for Comfort?

Is the recent market rally too fast for comfort? After a steep 26% rise in the S&P 500 in 2023, we’re up another 27% so far this year. With these gains compounding to over 60% since the bear market lows of 2022, many are wondering if this pace is sustainable. The fed recently lowered interest rates another 0.25% and noted that the economy is doing well, and inflation is staying low, for the time being.

All of this on the back of a dramatic presidential election that is sure to have far-reaching economic impacts. Tariffs, immigration policy, regulation, tax policy, and government spending are all on the table for 2025 when President Trump takes office. 

Immediately after the election, markets moved substantially. Small cap companies, banking, and cryptocurrency were all up substantially. Bonds, real estate and international stocks all lost ground. The election euphoria has since calmed with the market giving up about 60% of its post-election gains.

The overall rise in the S&P500 and technology over the last 2 years should be taken with a grain of salt. The top 7 of the 500 stocks in the index account for nearly 32% of the total index. That leaves the remainder to be split among the other 493 stocks. Those 7 stocks are all heavily invested in the technology and artificial intelligence sectors. The concentration we are seeing in the S&P500 index is causing heightened volatility where the highs can be higher, and the lows can be lower.

Clearly, the market is exuberant, but is it irrational? The future is certainly bright with the promise of AI, robotics, healthcare advances, and a developing world. However, it can be tempting to allow political bias to color our view of the future. Those pleased with the election results might find themselves overly optimistic and those who would have preferred a different outcome might be overly pessimistic.

It's not just political biases that can lead us astray. Investing is full of trap doors and hidden biases. Just to name a few:

Recency Bias: Assuming recent trends will continue indefinitely.

Confirmation Bias: Selectively seeking information that supports our existing beliefs.

Familiarity Bias: Over-investing in familiar sectors or companies, potentially overlooking better opportunities.

So, where does that leave us? First, we believe it’s important to recognize the impact of technological growth and lean into those areas of the market. There will be pullbacks and bumps along the way, but over the long-term, we want to have exposure to these markets. Second, diversification is more important now than ever. We don’t want to wager our financial future on the performance of 7 technology stocks in the S&P500. Finally, it’s important to control what we can. While we have no control over the direction of the stock market, we do have meaningful impact over our savings rate, tax strategy, risk management and sound financial planning which can all lead to better long-term outcomes.

If you have any questions about the current state of the markets, or how the election results will impact your financial future, reach out, we’re here to help.

The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities, LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but is not guaranteed by us as to accuracy or completeness. This is for information purposes only and in no event should be construed as an offer to sell or solicitation or an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP's express prior written consent.