Can you afford NOT to buy the S&P 500 Index Tracker Fund?

Another week, another record high at least across the pond if not here in the UK. The S&P 500 and Nasdaq Composite have once again led the charge, with investors still not ready to bank their winnings. The markets have clawed back the losses inflicted by the pandemic. In fact, US stocks had their best August since 1986. The biggest winners for the month included those hit hardest by the coronavirus. We’ve even seen Apple claim a $2trn market capitalisation and was the biggest contributor to the market’s gains during the period. Time will tell how long things continue. September has a well-known reputation as a poor month for equity returns. Since the Dow Jones Industrial Average was created in the late 1800s, the Dow has fallen an average of 1% in September. The Dow’s gain in all other months averages 0.7%. That said, in September of the average presidential-election year, the stock market actually tends to rise. So perhaps there is further upside for investors to look forward to this month. But with five straight months of gains under its belt, the stock market has every right to take a breather.   

Critics suggest the positive market momentum can’t end well. But in a low-return world, investors everywhere refuse to listen. TRINA (“there really is no alternative”) sums up an investment philosophy determined to make the most out of what is currently available. The most recent Bank of America-Merrill Lynch Fund Managers’ Survey reaffirmed the tone. August’s reading saw an uptick in bullishness by fund managers. A net 12% of respondents were overweight equities, an increase of seven percentage points since July. It was also the highest reading since the start of the pandemic. In addition, the number of speculators taking short positions in the market has fallen to the lowest level in at least 15 years. This suggests many bearish investors have decided to throw in the towel at a time when the market continues to perform positively    
Underscoring the mood has been recent commentary from the Federal Reserve. Jay Powell, Fed Chairman, said the long-standing policy of pre-emptive rate rises to prevent a spike inflation is likely to be a thing of the past. Rather than raising rates once the unemployment rate falls below a certain level, officials will wait until a tight jobs market has begun pushing inflation higher before thinking about tightening. The Fed’s shift underpins a determination to keep interest rates near zero, possibly for years, to help the economy recover from the coronavirus-induced recession. This momentous move is viewed as friendly to risk assets. But the S&P 500’s headline performance masks the performance of many stocks in the broader market. Share prices of about a fifth of index companies are more than 50% below their all-time highs. The average stock in the index is more than 20% below its peak. The concern is the handful of technology stocks that are leading the charge are masking big strains on businesses across the country. In the background, large US corporate bankruptcy filings are running at a record pace and are set to surpass levels reached during the financial crisis. The divergence between winners and losers has led some investors to describe the rebound as “K-shaped”, where some names have soared while others have lagged since the initial decline. That is further reflected in the fact that just three sectors have outperformed the S&P 500 so far this year: Technology, Consumer Discretionary and Communications Services. The latter two sectors, of course, benefit from the heavy weightings of Amazon in Consumer Discretionary, and Facebook and Alphabet in Communications Services. For many, the party continues. With a potentially contentious presidential election just around the corner, the market may have tougher challenges ahead. However with Trump in poll position, who’s going to bet against the market not reaching even greater heights. The question is, have UK investors here at home missed the boat or is there still time to jump on and make significant gains between now and the end of the year? With the right mix of UK and US investments this could turn out to be a better year than we all think.