And our anxiety not too far behind.
2-minute read
Does the date October 9, 2007 mean anything to you?
I imagine I was commending myself on the beginning stages of a mustache. Perhaps gearing up to average 3.7 points/game during the junior varsity basketball season.
I was thinking more globally but tough not to reminisce on fond memories.
I’d say I’ve come a long way, but my mustache would beg to differ.
Well, here’s how people in the finance world remember it.
Everybody loves all-time highs.
Or do they?
Huh?
Check out this headline from the Wall Street Journal. It occurred about six months after the one you just read:
Tough turn of events.
Certainly.
Hold up…aren’t we at all-time highs in the stock market right now?
Yes, the S&P 500 just closed at 5,321, marking an all-time high.[1]
So, what are you getting at? Are you saying in 6 months we will see Bear Stearns 2.0 and an oncoming market crash the likes of 2008?
No, but I think 2008, and human psychology to a larger extent, has us conditioned to think this way. We’re all waiting for the other shoe to drop.
Now you have me worried.
Check this out[2]:
What do we have here?
The blue line charts the performance of the S&P 500 since 1950. The green dots mark every time the market hit an all-time high.
The green dots seem to sit on top of one another.
Exactly. High points in the market tend to lead to even higher points in the market. This occurs because investors like seeing stocks rise which attracts buyers. Confidence and demand grow which pushes prices higher. This momentum can make for a sustained market surge.
I get it, but the market always falls. The other shoe always drops. And sometimes that shoe belongs to Shaquille O’Neal and crushes everything in its path like 2008.
Of course the market has a limit. And yes, there are points in history where all-time highs led to a spectacular crash. But as analyst Ryan Detrick points out, forecasting the next crash will result in missed gains in the market. You’ll likely lose more money defending yourself from the next crash than you would by sitting still in these clusters of all-time highs.
Can’t I just wait to invest when things feel normal and not so euphoric?
Here’s the funny thing about that:
Interesting.
Right, if you chose just to invest on days where the market was at an all-time high, your returns would be better than investing on any other days.
This goes back to your comment on higher stock prices and momentum.
Exactly.
Is it okay to say that I’m still worried? I mean, it just doesn't seem like this is sustainable.
That’s a totally normal feeling. Human nature is a powerful force, and the market will pull back eventually. Just don’t buy into the narrative of: “There’s going to be a huge crash because the market is too hot and we’re doomed”. As a parting note, I’ll leave you with this perfectly articulated comment from analyst Burt White. The guy nails it.
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[1] As of May 21, 2024 market close.
[2] Source: https://awealthofcommonsense.com/2024/02/all-time-highs-usually-lead-to-more-all-time-highs-in-the-stock-market/