The S&P 500 Is Up 13% This Year. Is It Overdue for a Steep Decline?
Key Points
The stock market has been soaring this year, despite plenty of uncertainty and question marks.
Even if the market may be overdue for a correction, predicting when it might happen is next to impossible.
Investors can reduce their portfolio's overall risk by focusing on safer stocks and dividend investments.
Investor sentiment has been changing rapidly this year. At one point, the S&P 500 (SNPINDEX: ^GSPC) was down by more than 7% as the war in Iran began. But now, with a recent round of solid tech earnings in the books, investor sentiment appears strong once again, with the broad index up around 13% and hitting a fresh all-time high on Tuesday.
Forget inflation, rising oil prices, trade issues, and a K-shaped economy; all those fears. The market is still running red hot. But the big question is: can it last? Is the S&P 500 likely to rise even higher this year, or could this recent rally inevitably lead to a much larger disaster later on?
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The S&P 500 may be on borrowed time, but when it runs out is anyone's guess
Tech stocks have been propping up the S&P 500 for a while now. And as long as investors remain bullish on the sector, the index can remain strong. It comes down to whether there is a tech bubble and whether it will pop. If it does, then the S&P 500 could be due for a significant pullback.
However, that doesn't mean a crash is coming anytime soon. What I've learned from following the markets over the years is that valuations and market behavior can be unsustainable for a long, long time; there's no sense in trying to guess when a correction might come. Economist John Maynard Keynes famously said, "Markets can remain irrational longer than you can remain solvent." Thus, trying to bet against the market isn't necessarily the best move.
Investors should take steps to protect their portfolios sooner rather than later
Tech stocks may have the furthest to fall if there's a correction or crash in the markets. For investors who are looking to reduce risk and exposure in the event of a significant sell-off, the good news is that by investing in blue chip stocks with excellent financials, there are ways to make portfolios less vulnerable to sizable declines. While no stock is entirely free of risk, buying quality stocks at reasonable prices is never a bad idea.
Buying dividend stocks can also be a good move, as their payouts can boost a portfolio's gains and add some safety and stability along the way. They may not make for exciting investments, but they can prove to be more sensible options at a time when many stocks are trading at excessive levels.
David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.