Summary of research on this topic:
As of February 5, 2021, the US market capitalization is worth double the level of GDP.
It’s not a question of if we’ll see a correction – it’s a matter of when.
The US stock market has seen astronomical growth since March 2020 when the S&P 500 tanked 30% due to COVID-19. The level of growth we have seen is unprecedented and unsustainable.
The technology sector is what experienced the majority of this growth. Nearly every major technology company on NASDAQ is at all time high levels.
Low interest rates and even negative interest rates have caused the bond market to dry up. Investors are moving their funds into the stock market where they can still earn a positive return.
We have also seen a significant flow of capital into the market from retail investors thanks to the increasing popularity of commission-free platforms.
We do not insist on liquidating positions, but rather to proceed with caution.
Consider allocating a decent proportion of your holdings into defensive companies – companies that produce products or services that will always be in demand and will be less impacted when capital flows out of the stock market and back into the bond market when interest rates inevitably rise – given the current economic situation this will likely be a while.
Consider increasing your proportion of dividend-generating equities.
When will interest rates rise? When unemployment is at reasonable levels and the world starts recovering from COVID-19. When will this happen? Your guess is as good as ours, but it will eventually happen, so prepare for it.