When Do We Get to the Bearish One?

On April 2, 2012, the S&P 500 Total Return Index hit 2449.08, the first time the major US equity gauge peeked above its pre-Financial Crisis high. That’s right, for more than two years stocks have been irregularly advancing to new record highs. If you invested $100,000 that very day—at the first new all-time high—it’d be worth $145,162.30 as of June 23, 2014, 105 all-time highs later.^[i] Yet through this span, most personal-finance-page pundits have proclaimed you’d be cuckoo-for-Cocoa-Puffs to buy stocks when markets are at or near all-time highs.^[ii]Just this week, readers were assured that when stocks are this high, a crash can’t be far away.^[iii]The trouble with this logic is it’s illogical and, as illustrated, may leave you missing parts of an otherwise complete breakfast.

On nearly every single piece of correspondence your financial professional ever sends you, the words PAST PERFORMANCE ISN’T INDICATIVE OF FUTURE RESULTS are emblazoned across the bottom. Now, some folks think this is just legalese, brokers covering their ... ummm ... caboose? But it is one of the few instances where legalese also constitutes highly useful financial advice. Stocks are not serially correlated, which is a fancy way of saying yesterday’s movements are irrelevant to today’s, tomorrow’s or next Tuesday’s.^[iv] An all-time high, or any index level, is past price movement. It is simply not relevant for predictive purposes, up or down.

The decision investors should focus on is: Is the expected long-term return on your present investments in line with your goals? For example, if you need long-term growth to reach your goal, and you’re invested in cash, there is a problem. Cash does not yield growth, it impairs it. If your goal requires growth and you’re heavy on cash, I’d suggest you should have a really solid, strong rationale as to why. Stocks’ being near an all-time high is a fun factoid, but the fact there were over 150 in the 1982 – 1987 bull market, 300 in the 1990s and 106 in this very cycle should show the illogic of assuming new high automatically means new bear.^[v]

On the bright side, those basing bearishness on all-time highs after seeing more than 100 signals do have their uses: When these heels-dug-in bears finally capitulate, it’s a good sign it’s finally time to start questioning how many more all-time highs remain in this bull.