The stock market has recovered from the COVID-19 crash. The NASDAQ has made a fresh all-time high, and the SPX was briefly positive for 2020. Price momentum has been strong, and broad. Analysis from Topdown Charts shows that 74% of countries are now in bull markets.
On the other hand, the macro outlook and valuations are stretched. The market is trading at a forward P/E ratio of over 21. Even with headline CPI at -0.1%, the Rule of 20 is flashing a warning for the stock market.
The current market environment raises the level of career and business risk for investment managers. Traditional investing approaches would call for prudence in the face of elevated valuation and heightened macro risk. On the other hand, if the strong market breadth were to continue, it would mean an investment environment reminiscent of the go-go days of the dot-com bubble, or the Nifty Fifty era. A defensive posture in the face of a investment bubble risks the loss of clients and damage your career. Adopting a price momentum approach to investing while ignoring valuation also risks the perception of recklessness that can forever stain a career.
What should an investment professional do in the face of such career risk volatility? There are no easy answers. Let's consider how two well-known investors have approached the problem.
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