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All-Time Highs Again Thumbnail

All-Time Highs Again

Mike Earl, CFP®, CPWA®

tl;dr version of this post: all-time highs in the stock market usually mean the stock market will be even higher one year hence. The stock market has been sitting at an all-time high for nearly 30% of its history; it's quite common. While all-time highs make some investors skittish (because they fear a downturn coming after an all-time high), we advise clients to stay the course.

This post was inspired by a friend telling me he had moved half of his 401(k) into cash. Why? He felt that since the Dow had struggled these past two years in this 35,000 - 37,000 point range, it must be ripe for another correction.

I wrote about the stock market being at all-time highs way back in 2016. The S&P 500 Index stood at a pedestrian 2,200 back then...today, it's at 4,746. More than doubled in about 7 years! If you had exited the market back then due to all-time highs meaning the market was overvalued, you would be a lot poorer for it today.

It's a good reminder that these concerns are nothing new. And the doomsayers (who shall remain unnamed) have been predicting massive crashes for as long as they've been alive...or been given a platform on which to speak.

Even if we go through a 30% bear market right now (not a prediction; I remain bullish as always), the S&P 500 Index would fall all the way down to 3,322...which is still more than 50% higher than it was in 2016.

In the good times (financially speaking), there is a wariness in some of us that says: "Maybe things are too good. If the stock market is at all-time highs, isn't it doomed to go back down?"

This kind of pessimism can be an outworking of self-preservation. Rather than get our hopes up (or get too greedy), we tell ourselves that hard times are coming. There is an extent to which this kind of thinking is healthy. There is a danger in assuming that America will always be on the ascendant and that economic growth is inevitable.

We each seek to find a balance between a "pauper mentality" and a "profligate spender mentality". This is not easy to do, as many of us can err toward one of these extremes (perhaps an example here is my reluctance to part with my 2007 Toyota Yaris).

In the present situation, one error is holding fast to a "bunker" or doomsday worldview. Because Rome fell, surely the USA Empire will collapse in short order. "Have you seen the national debt lately?" And any prosperity we have will be short-lived, so you better not indulge in any luxuries (be they minor or major). It's time to hunker down and stockpile assets, because you never know when Armageddon will come.

The other ditch is assuming that science and technology will inevitably lead to increasing levels of economic prosperity. Living beyond one's means due to believing that our "means" will simply increase over time.

That's enough philosophy for now.

Let's dig into some hard numbers, brought to my attention today by Ben Thorson.

Two things stand out:

  • The market sits at an all-time high nearly 30% of the time! Quite a common experience.
    • If someone is an investor for 70 years (age 25 to 95), they will have 20 of those years with the stock market sitting at an all-time high.
  • If the stock market is at an all-time high, the average 3-year return going forward is 38%. Who wouldn't take that kind of return over any 3 years?
Charts courtesy of Charlie Bilello of Creative Planning

When the market is at an all-time high, you have an 80% probability of the market being even higher a year later. This figure is higher than the 75% probability of the market being higher in any given year, regardless of starting point.

What does it mean to you, our client?

We can be grateful for the growth of our assets during the bull market. We don't have to live in fear about what will happen next.

And yes, a bear market will come at some point -- no different than winter coming every year. If we are mentally prepared for it, we can weather the downturn with greater poise each successive time.