Equity markets continue to climb the proverbial wall of worry, reaching a series of new highs throughout 2021. The rise in stocks has been largely uninterrupted since November, without even a 5% market pullback, supported by abundant monetary and fiscal stimulus and solid economic growth and corporate earnings. But with a number of concerns on the horizon, investors are wondering: what’s next?
While the market could certainly continue its upward trend, the recent extended period of limited volatility is unusual in a historical context. As illustrated above, the S&P 500 index has now surpassed 200 consecutive trading days without a drawdown of at least 5% from a recent peak — more than double the historical average of 84 days since 1950. In fact, there have only been eight other instances of such a long stretch in the past seven decades. Of course, the market will turn volatile again at some point, and investors should be prepared for that. The catalyst for a change in sentiment is always unpredictable. Potential factors today include elevated valuations, the evolving inflation outlook, higher tax rates, the debt ceiling, and a hawkish shift in Fed policy — any of which could cause investors to recalibrate their expectations.
Despite these potential concerns, the outlook for economic growth in the coming quarters remains solid, and Fed policy is expected to remain broadly supportive, both of which should support a continuation of the current bull market. While the path ahead could be a bit bumpier than the relatively calm conditions of the last 10 months, periods of equity market volatility are a natural and unavoidable part of the market cycle and ultimately create opportunities for patient, long-term investors.
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