But in the current climate, stocks could easily fall much further. When the market is dropping, pouring more hard-earned cash into stocks may seem perverse. Why place $100 into the maw of a machine that reduces it to $93.16 in one month’s time?
That is, essentially, what the stock market did to investments in the S&P 500 index in October, the worst month for stocks in seven years. And that figure doesn’t include potential fees to investment houses, which can devour cash, even as your stake diminishes.
Despite a one-day bounce the day after the midterm elections, November so far has been a mediocre month for the market. I’ve been wincing as I examine my own portfolio, even though I’ve buffered my stock holdings with healthy allocations of bonds and cash.
What’s worse, some persuasive analysts marshal strong arguments that the main trend for stocks at the moment is downward. “There’s a good chance that the bull market is already over, that it ended in September, and that a bear market has begun,” said Doug Ramsey, the chief investment officer of the Leuthold Group in Minneapolis.
Rising interest rates are a disturbing portent for stocks, he noted, and they are climbing rapidly now. “The rate of change, not the absolute level of interest rates, is what drives the market, and the rate of change has been very high,” he said. It’s probably not a coincidence, he said, that the stock market ran into trouble in late September, just as bond yields were reaching new highs for the year.
Despite recent declines, Mr. Ramsey said, the American market is still overvalued. He calculated that stocks need to fall 25 percent below their Oct. 31 levels in order to reach their median valuations since 1970. Stocks outside the United States are about 10 percent underpriced compared with their historical valuations, he said, so there are better opportunities in market niches around the world.
But while Mr. Ramsey is concerned about American stocks, he says it makes sense for long-term investors to stick with them and stocks elsewhere, too, for the standard reasons. He can’t forecast short-term market returns accurately either, he said, and equities have provided superior returns over extended periods.
