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Thanks for signing up! Our mission at Marketplace is to raise the economic intelligence of the country. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting. Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. Skip to content. I've Always Wondered Janet Nguyen Oct 21, Share Now on:. Stocks have trended upward over the long run, along with the U.
Share Now:. Many market watchers, for example, have been ringing alarm bells surrounding the sky-high growth of Tesla stock in recent years -- arguing that its value does not align with its production output and fundamentals. Yet some with so-called DiamondHands who have been able to ignore this have seen themselves become "Teslanairres" in recent years as the electric vehicle maker's stock value continues to climb. Tesla aside, overvaluation estimates for the stock market as a whole is "speculative," Goldstein said.
While he stresses it is ultimately difficult to know for sure whether stock prices are creeping towards a bubble, Goldstein said that, "The indicators that we see, I think give us some reason to be worried that stock prices might be too high.
The Federal Reserve also warned off rising asset prices being vulnerable to "significant declines should risk appetite fall," in its semi-annual Financial Stability Report released in May, noting that "prices are high compared with expected cash flows. Fed Governor Lael Brainard pinned increased appetite for risk and rising valuations in part on retail investors, referencing "the 'meme stock' episode" in a statement accompanying the report. The increased appetite for risk has also been seen in the bond market, Brainard added.
In the midst of the crisis, the stock market fell sharply in March when it had been at record highs -- but then rallied back to reach new highs within months. Much of the pandemic stock markets gains can be pinned in part to aggressive monetary policy by the Federal Reserve in response to the pandemic, some economists say. The Fed pulled out all of the stops, slashing the target for overnight interest rates to almost zero, buying massive amounts of Treasury and mortgage-backed securities, encouraging bank lending and taking other steps to sustain the flow of credit.
If the Fed starts tapering its purchases of securities -- which it signaled after its Sept. The Fed has been buying Treasury securities and mortgage-backed securities each month starting in March Tapering means the Fed would slow its purchase of these assets. History says investors struggle to be patient, and market jitters inevitably result in some investors making the decision to sell stocks. For some, reducing exposure to equities may be a prudent one — if an individual is near or in the retirement phase of their investing life where income takes on greater significance than absolute equities' appreciation they may be overweight the U.
But for most investors with a longer time horizon — and even for retirement-age investors — the decision to go to cash should not be a binary one between either being in the stock market or out. All the research says that tends to be a bad decision.
Going to cash requires being right twice — when you get out, and when you decide to get back in. And it's the latter that often has major consequences for investors. Far too many people become tentative about getting back in and miss long periods of gains. The history of market corrections, bear markets, and rebounds, shows that a do-nothing approach tends to benefit investors with time more than a go-to-cash approach, but according to top institutional investors, neither is the best way to act.
Research has consistently shown that time in the market is more important than perfect timing, but that does not mean money should not move from one part of the market to another on a relative valuation basis.
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