Stock Market at Record Highs – What Now?

Stock Market at Record Highs – What Now?

The stock market has been rising fairly steadily for some time. Depending on the newspaper you read, or the analyst you follow, this “bull market” has been going since March of 2009, or September of 2011. As the “nominal” columns in the table at right indicate, the market is reporting higher index values than ever before. Stock market news programs have been talking about new all-time highs (emphasis theirs).

Some market observers have suggested that now is a good time to take gains, or even to sell all stocks. The say that the stock market can’t go higher, won’t go higher, is unlikely to go higher, etc.

(By the way, this at the same time that others recommend selling bonds to buy stocks! Why can’t all market observers ever agree on what we investors should do?)

What does an “all time high” mean?

• An all-time high doesn’t necessarily imply that a crash is coming.
  • When the stock market is going up, there can be “all-time” highs for years without signaling a market decline. For example, from 1990 through 1999, there were all-time highs in the S&P 500 almost every year, and often many times a year. Therefore, the market being at an all-time high tells us little or nothing about where it is going.
  • Adjusting for inflation, the stock market has not yet returned to its levels in 2000, using either the S&P 500 or the Dow Jones Industrial Average (DJIA). See the “Real” columns in the table.
  • Standard measures of stock market value, including S&P 500 Price Earnings (PE) Ratio and Shiller’s PE ratio (the so-called PE 10), are not at extreme levels.
    • The Shiller PE “called” the sharp stock market decline of the early 2000s, and had it been calculated then, would also have “called” the crash of 1929. Current PE 10 levels are lower than they were for much of the 1990s. (A high PE 10 would indicate an expensive market.)
    • P 500 PE tends to be unhelpful as a predictor of stock market declines, it is slightly higher than normal, meaning that the market might be more expensive than usual.
    • However, the S&P 500 dividend payout rate coupled with low interest rates indicates that the stock market might be a little less expensive than usual.

• On the other hand, it is easy to think of potential events that could lead to significant market declines:
  • The financial crisis in Cyprus might turn out not to be resolved.
  • The financial difficulties in Italy and / or Spain might turn into full blown crises.
  • The situation on the Korean peninsula might take a turn for the worse.
  • The situation in Syria might trigger a crisis in Israel.
  • Iran might develop a nuclear weapon or Israel might strike at Iran to prevent that from happening.

Your Best Defense

In short, the stock market is unpredictable. There is little indication that it is more or less unpredictable today than at other times.

Your best defense depends on you, and not on managing your stock market holdings:

1. Have a solid financial plan, one that does not depend on what the stock market does.
2. Take no more stock market risk than you can afford.
3. Once you’ve selected your level of stock market exposure, don’t try to outguess the market. There is a lot of evidence that people tend to manage their investments with their emotions. That tends to produce buying high and selling low, on average and over long periods of time.

If you have concerns about any of items 1, 2 or 3, please get in touch with me or your advisor.