The past four trading days, i.e. the first week of 2018, have provided investors with what many are hoping will be the first of many big weeks this year. U.S. stock markets have all increased by more than 2% in week 1, propelling some analysts to consider revising forecasts for 2018 barely 2% of the way into the New Year.
With such a strong start, the question of whether hanging on or bailing out may seem silly. That said, growing sentiment about a potential "melt-up" in which valuations eventually hit unsustainable levels has begun to surface. While many fundamental metrics show serious signs of overvaluation in today's equity markets, the argument that the majority of the valuation growth seen today will come to fruition in the near term as economic growth continues to expand courtesy of a growth-friendly tax plan which has just been introduced, perhaps investors can continue to hang on with little fear of reprisal in the near term. The Volatility Index (VIX) remains muted, and investor concerns, where there are any, appear to be few and far between.
As a cautious long-term investor, I must reiterate the importance of a well-balanced portfolio focusing on a healthy combination of equities and fixed income/alternative investments to round out an appropriate risk profile in a world where many of the risks (geopolitical, market-based, idiosyncratic, or otherwise) are not being priced in properly, in my opinion.
Invest wisely, my friends.
