As Covid-19 spread worldwide in early 2020, the UK and US stock markets crashed. By ‘Meltdown Monday’, (23 March 2020) the FTSE 100 had crashed 2,680 points from its 2020 peak to close at 4,993.90 points. But the subsequent period has been spectacular for shareholders and buyers. On Friday, the Footsie closed at 7,123.27, up almost 2,130 points. That’s a rebound of 42.6% in 15-and-a-half months. But returns from the US S&P 500 index have been far greater.
The S&P 500 has almost doubled
On 23 March 2020, the S&P 500 closed at 2,237.40 points. The main US index first reached that level in December 2016, so Covid-19 wiped out over three years of gains. But on Friday, the index closed at 4,352.34. That’s an increase of almost 2,115 points, for a whopping 94.5% gain. Thus, the US market has almost doubled in a year plus 100 days. That’s an incredible return, beating other major stock markets hands down.
Exuberance and euphoria make me nervous
When it comes to successful investing, our human brains are hard-wired to behave in unhelpful ways. When markets are rising, optimism takes over, leading to irrational exuberance and euphoria. These powerful emotions can cause us to be overly positive and, therefore, willing to pay overly high prices for assets. Likewise, when markets are crashing, fear, uncertainty and doubt can deter us from buying really cheap stocks. And when I look at the S&P 500 today, I see big helpings of both euphoria and risk.
The world’s greatest investor, mega-billionaire Warren Buffett, once wisely remarked, “Be fearful when others are greedy and greedy when others are fearful”. Right now, it appears that investors are ignoring the Oracle of Omaha’s sage advice, having happily ridden one of the steepest bull markets in modern market history.
I bought big in March 2020. Should I sell now?
When the market crashed last year, my family portfolio was invested 50% in cash. It had been that way since late 2019, when we banked hefty profits from switching from UK shares into US stocks following the Brexit vote in mid-2016. In late March 2020, with the world paralysed by fear, we took Buffett’s advice by being greedy. Every penny went back into stocks, with a heavy focus on the S&P 500. Hence, we have captured most of the near-100% gain in the US stock market over the past 15-and-a-half months.
But now, I strongly feel like taking Uncle Warren’s advice once more. That’s because I’m feeling fearful again, just as I was in mid-2016 and late 2019. As a natural contrarian, I’m usually happy to go against the herd by selling fearfully when others are buying greedily. After all, as Lord Rothschild is alleged to have said, “No-one ever went broke taking a profit.” But market timing is notoriously difficult — and I’ve already been right (or lucky) twice in five years.
Therefore, should I sell out of the S&P 500 today, given its stratospheric rise since March 2020? Despite seeing plenty of evidence of crazy behaviour, I’m going to sit tight — for now, at least. Instead, I’m going to pump future cash (regular share dividends, lump sums, one-off windfalls) into FTSE 100 shares. While the S&P 500 may be expensive in historical terms, I see the Footsie as being far too cheap. By investing in UK shares, I’m sticking with my long-held winning strategy of paying low or fair prices for shares in good companies!
