Recently, we’ve been hearing a lot of headlines about how the market keeps reaching all-time highs. In fact, as of September 2nd, the S&P 500 had reached a closing high 54 times in 2021. A rising stock market paired with historically high valuations in some areas of the stock market has a lot of people wondering: are we due for a market pullback?
The question is an interesting one. Asking the question of whether we’re due for a stock market pullback implies that there is an inherent belief that the stock market is more likely to decline after it reaches a high. Is that true? Now is the time when I could throw a bunch of technical charts and data at you to try to convince you that the stock market is not more likely to decline after all-time highs. I already did that in this article, and if you receive our weekly emails (visit our blog home page to subscribe if don’t already) , you get a continuous diet of charts and graphs. I’m going to take a different approach today, and I’m just going to highlight one chart.
The chart above shows how over long periods of time, the stock market tends to go up – at least, historically that has been the case. We expect markets to grow, otherwise we wouldn’t invest. So, are we surprised when the stock market reaches all-time highs? We shouldn’t be.
What Did You Expect?
Here’s another perspective. My daughter will be turning two soon, and she’s growing like a weed. I don’t see the growth every day. However, I know that it’s happening on a micro-scale, because when I look back over the course of several months, I can see the changes. When we last went to the doctor, they measured her. You know what has happened during that visit, and during every visit we’ve gone? She’s reached an all-time high! So, I told my wife, “Hey, we should really buy some smaller clothes because she’s bound to shrink any day now with all of these all-time highs she’s reaching”.
Of course, I didn’t actually say that. Being the proud (tall) dad that I am, I’m always pleased to hear she continues to grow. I expect it. It’s good to grow. It would be unexpected if she shrank. If we also expect the stock market to grow, why is it news when the market does, indeed, grow? And worse, why would we make a change to our portfolio based off the idea that the market might not grow tomorrow? Don’t buy smaller clothes for your portfolio.
I get it – it’s not that simple. On average, the stock market actually declines a little less than 50% of the time, if we’re looking at daily numbers. But you know what that means? It means that a little more than 50% of the time, the stock market goes up, which means we expect it to go up. So if the stock market is at an all-time high, and we expect it to go up on any given day, what will that mean for tomorrow? It means we expect to see another all-time high tomorrow.
Optimism Triumphs
If you start to get too technical and you start really focusing on daily numbers, you might find a reason to expect something else. But here at Flagstone, we have the philosophy that optimism triumphs. There are many reasons you might not want to stay invested – or to start investing, for that matter. There’s a lot of bad news in the world that might cause you to fear what’s going to happen in the stock market. There’s also a lot of good news. We try to focus on the good news, and that attitude generally leads to a better investment experience.
We recognize that we don’t know what’s going to happen tomorrow. We could see the start of a two-year bear market. We might also see another all-time high. What we do know is that the stock market has generally gone up over long periods of time, and we’re not focused on daily ups and downs. We take a long-term, disciplined approach that can handle lots of the uncertainties of the markets, and then we maintain a positive attitude.
Timing The Market
The financial news media is notorious for creating drama. Part of me wonders – if the talking heads on TV and the clickbait articles online weren’t constantly telling investors that the market is reaching all-time highs, would they really care? I mean, would it cause the same emotional responses? Maybe folks would just look at their quarterly statements and be happy their balances are higher! Instead, many investors digest the headlines of the financial news media, and it causes them to think it’s time to sell. You might be able to find some technical analysis (i.e. not reliable, empirical data) that indicates it is time to sell. Even if you are right, and the stock market drops the day after you sell, when do you get back in? Your guess is as good as mine. If you time it wrong, you might miss out on the recovery, which might more than offset the benefits of your decision to get out at the right time.
The bottom line is simple: craft a portfolio (potentially with our help) that makes sense for your appetite for risk, your need for portfolio growth, and your time horizon. Then turn away from the screen, have a positive attitude about the future, and enjoy what life has to offer – like watching your kids or your grandkids reach all-time highs.
