How to Invest in a Pandemic, Political Crisis and Possible Bubble

On the face of it, stocks have behaved impossibly well since they began rebounding last March in response to the Federal Reserve’s emergency intervention in the markets.

Since then, the S&P 500 has returned more than 70 percent, including dividends. That would be a remarkable performance at any time. It is especially impressive during a pandemic, a severe recession, and a riot in the nation’s Capitol accompanied by a full-blown constitutional crisis. The presidential transition has been rockier than any in more than a century, yet the stock market has remained eerily unperturbed.

For investors, the market’s astonishing rise is cause for celebration, of course. It is hard to object when you become richer (though the recent gains seem a bit less awesome when you remember that they came after the S&P 500 declined 33.9 percent from Feb. 19 to March 23 last year).

But these giddy heights may be treacherous. While Wall Street remains generally bullish, some market strategists warn that stocks have already formed a bubble that must inevitably burst.

We don’t know whether the market has reached a peak, or whether the upward trend will continue for months or years. Timing the market doesn’t work well for most people. The best approach for long-term investors is often said to be setting up a portfolio with a reasonable, diversified asset allocation and then living with it, come what may.

Still, this is one of those moments when it may be worth scrutinizing the market closely, and making adjustments, if your own strategy hasn’t been well formulated. Our quarterly report on investing is intended to help, by providing broad coverage, as well as some tips on how to navigate these difficult times, some counsel and some humor.

The market has been so great that it may be almost ready to burst.

The market just kept on rising, even as crises in the United States multiplied and deepened. It is possible that the economy will boom once coronavirus vaccinations become more commonplace, but if there is not a great economic expansion later this year current stock prices may not make sense.

Bond yields are low, and some funds are heading into unexpected territory.

With the yield on a 10-year Treasury note hovering close to 1 percent, so-called unconstrained bond funds may be able to produce higher yields, but as their name suggests, they have a great deal of freedom and may be loaded with surprises, good and bad.

When the markets get exciting, sit back and do nothing.

Once you have set up a portfolio with a diversified mix of stocks and bonds, using mainly low-cost index funds, you don’t need to do much more, except periodically rebalance it to make sure the stock-bond asset allocation is still appropriate. Most of the time, in fact, it’s best to do nothing.

There are many roads to stock market profits.

Big tech stocks like Apple, Amazon, Facebook and Google have led the market upward for several years, but lately, the bull market has broadened, and mutual funds prospered with holdings including Latin American firms, U.S. value stocks and clean energy companies.

Value investors are hoping their day has really come.

After lagging for years, funds that hold beaten-down value stocks have surged, in expectations that the economy will boom later in the year. Such rallies have been ephemeral before, however.

For other views of the financial world, take a deeper look at our report:

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