Investors are often told to wait for a pullback in the markets before investing. That’s certainly been the case with the S&P 500. The index has reached record highs again and again this week, and it’s causing some to simply wait while it rises.
Yet there are many reasons why the market has been climbing and should continue to do so. Let’s look at why investors should consider getting in on the action instead of waiting around and losing money.
What happened?
First, let’s look at a few reasons driving these record highs. A significant driver is the anticipation that the Federal Reserve is likely done with rate hikes and may pivot to rate cuts. This expectation has boosted investor confidence, as lower interest rates generally support higher stock prices by reducing borrowing costs for companies and increasing consumer spending.
Recent inflation data has shown that both the Consumer Price Index (CPI) and the Producer Price Index (PPI) are stabilizing or decreasing. This alleviates concerns about persistent inflation, suggesting a more favourable economic environment for continued growth. With inflation cooling, the economic outlook appears more stable, reducing the likelihood of aggressive monetary tightening.
Despite tighter financial conditions over the past year, consumer spending has remained robust. This strength in consumer demand supports economic growth and corporate earnings, which, in turn, fuels stock market gains. Specifically, consumer discretionary stocks in the S&P 500 have performed well, indicating strong underlying consumer confidence and spending power.
Finally, technology stocks particularly those related to artificial intelligence, have been leading the market rally. The strong performance of major tech companies has significantly contributed to the overall rise of the S&P 500. Investors are optimistic about the future growth prospects of these companies, further driving up their stock prices.
Why wait?
So, with all this driving it upwards, there are still reasons to get in even amongst highs. Timing the market is notoriously difficult and often leads to missed opportunities. Research shows that missing just a few of the best-performing days in the market can significantly reduce overall returns. Consistently predicting market pullbacks and upswings is challenging, even for seasoned investors.
Historically, the S&P 500 has trended upwards over the long term despite short-term volatility. Investors who stay invested typically benefit from this long-term growth. Attempting to wait for a pullback can result in missing out on potential gains during periods of market strength.
Plus, investing earlier allows for the power of compound growth to take effect. The longer money is invested, the more time it has to grow. Delaying investments in hopes of a market pullback can mean losing valuable time that could have contributed to compounding returns.
Instead of waiting for a pullback, investors can use dollar-cost averaging, which involves regularly investing a fixed amount of money, regardless of market conditions. This strategy reduces the impact of market volatility and mitigates the risk of investing a lump sum at a market peak.
What to buy
Now, how can Canadian investors get in on the action? If you’re looking for a TSX-listed exchange-traded fund (ETF) that invests in the S&P 500, the iShares S&P 500 Index ETF (CAD-Hedged) (TSX:XSP) is an excellent choice. This ETF aims to replicate the performance of the S&P 500 Index while hedging its exposure to the U.S. dollar relative to the Canadian dollar.
One of the primary benefits of investing in XSP is the direct exposure it provides to the 500 largest publicly traded companies in the United States. This offers investors a broad and diversified portfolio across various sectors and industries, which can help mitigate risks associated with investing in individual stocks. The S&P 500 Index has historically demonstrated robust long-term performance, making it a solid foundation for many investment portfolios.
Altogether, if you’re looking for a strong way to invest in the S&P 500, XSP ETF is perhaps the best way to go.
