Dear Uplevel,
Interest rates are at their highest levels in years, oil prices are up, the Fed just raised rates, and there’s an election coming up. But I keep hearing that the stock market is near record highs. How does that make sense—and should I be worried that the market is too high?
Sincerely,
Waiting for the Other Shoe to Drop
Our Take
Dear Waiting for the Other Shoe to Drop,
You’re not imagining the disconnect.
Investors have plenty to worry about right now. Interest rates have climbed to levels we haven’t seen in roughly two decades. Oil prices moved sharply higher over the summer. The Federal Reserve raised rates in September for the first time in three years. And November’s midterm elections add another source of uncertainty.
And yet, the stock market has continued to hold up remarkably well.
The S&P 500 gained 2.3% during the third quarter and was up 12.7% for the year through September.
So how can the market keep rising with so much uncertainty?
Because the stock market doesn’t respond to headlines alone.
Ultimately, stock prices are driven by many things, including the economy, corporate profits, and what investors expect businesses to earn in the future. And despite some unsettling headlines, the underlying picture has remained relatively strong.
The economy has continued to grow. Corporate earnings have been strong. Investment in artificial intelligence and the infrastructure needed to support it has continued. And the strength in the market hasn’t been limited to just a handful of large technology companies.
Energy is a good example. Higher oil prices can create challenges for consumers and contribute to inflation, but they can also benefit energy companies. Through the end of September, energy was the best-performing sector of the S&P 500, up 37.4% for the year.
That’s an important reminder: the same economic development can affect different parts of your portfolio in very different ways.
But aren’t higher interest rates bad for stocks?
They certainly can be.
Higher rates make borrowing more expensive for consumers and businesses. They can slow economic activity and make bonds more competitive with stocks.
But there’s an important distinction between saying higher rates can be a headwind and assuming higher rates automatically mean stocks should fall.
Why rates are rising matters.
Historically, stocks and interest rates have sometimes risen together when economic growth, corporate earnings, and business investment remain strong. That’s essentially what we saw during the third quarter: rates moved higher while major stock indexes remained near record highs.
There’s also a silver lining for investors who own bonds. Rising rates have caused some short-term pain for bond prices, but higher yields mean bonds can now generate considerably more income than they could during the ultra-low-rate years following the financial crisis.
Okay, but should I be nervous when the market is near an all-time high?
It’s understandable. “All-time high” can sound a lot like “too high.”
But an all-time high by itself tells us very little about what happens next.
Over time, a growing economy and rising corporate profits naturally lead the stock market to reach new highs. If markets never surpassed their previous highs, long-term investing wouldn’t work particularly well.
That doesn’t mean stocks can’t decline from here. They absolutely can—and at some point, they will. Pullbacks are a normal part of investing.
The problem is that waiting for the world to feel safer before investing usually doesn’t work very well. There is almost always a reason to worry, and markets often begin moving before the headlines become reassuring.
What about the midterm election?
November’s midterm elections will almost certainly generate plenty of headlines.
Politics matter enormously in our lives. Tax policy, government spending, regulation, and other policy decisions can have real economic consequences.
But that doesn’t mean election predictions make a good investment strategy.
Since 1933, the S&P 500 has averaged an 8.6% total return during midterm election years, and markets historically have performed well under many different configurations of political control.
That’s why we generally encourage investors to separate their political views from their investment decisions.
So, what should I actually do?
Probably less than the headlines make you feel like you should.
We don’t know exactly where interest rates go next. We don’t know where oil prices will be six months from now. We don’t know how markets will react to the midterms, or whether enthusiasm around AI will accelerate or cool.
And we don’t need to know.
A diversified portfolio is built around the idea that different investments will respond differently as conditions change. Energy may benefit when oil prices rise. Bonds may become more attractive as yields increase. Different areas of the stock market can take turns leading.
The goal isn’t to predict which one will win next.
It’s to build a portfolio that doesn’t depend on getting that prediction right.
The bottom line:
Markets can rise even when the headlines feel uncomfortable. In fact, uncertainty is a normal part of investing—not an exception to it.
Rather than asking whether today’s market is “too high,” we think a more useful question is: Is my portfolio still appropriate for my goals, my time horizon, and the amount of risk I’m comfortable taking?
If the answer is yes, what happens next with the Fed, oil prices, the election, or the market becomes a lot less important.
Still have questions?
If the headlines have you wondering about your portfolio, reach out. We’re always happy to talk through what’s happening and what it means—or doesn’t mean—for your financial plan.
Onward and Uplevel,
Anika & Amanda
Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR, and virtually throughout the U.S.
