What Goes Up Might Not Come Down

The law of gravity states that what goes up must come down. But the laws of economics say that investors generally are rewarded for staying invested.

Stocks are hitting all-time highs right now, but what does that mean for investors? The phrase “all-time high” conjures up the image of a stock chart at its peak. But while “all-time high” is accurate in terms of describing the market relative to the past, to some it also implies that the market may be overvalued and primed for a fall.

But the markets go up and down all the time, and they tend to go up more than they go down. So just because the market is higher than it’s ever been does not mean that it is soon going to fall. In fact, the market has spent much of its history at an “all-time high.”

While a particular day being an all-time high is slightly unusual, most investors don’t move in and out of the market on a daily basis. For more relevant investor scenarios, the market being at or near a high is historically common. For example, since March 1957 (when the S&P 500 began in roughly its current form), 178 months have ended in market highs – that’s approximately 24.1% of the time. When looking only at year-end, more than half of the years since 1957 have ended higher than any previous year.

While the two previous market highs of July 2016 and March 2013 were followed by positive 18.9% and 13.9% 1-year returns, respectively, the market high prior to the global financial crisis is the exception everyone worries about. The brief 2007 peaks followed the long recovery from the tech bubble with unfortunate timing. The 1-year return from that market high (5/30/2007) was -7.8%, but that was just the beginning of the market decline. The S&P has nearly doubled since then, but the event remains in the minds of investors today. The following graph highlights how much higher the market continues to climb even after each market high (depicted via the arrows below).

[source: Yahoo Finance]

To put these market highs in perspective, we list the distinct new market highs for the S&P 500 since 1957:

I make no claim to be able to predict the future. And I certainly do not imply that this pattern will so favorably continue, but looking at the data can assuage fears: investors should not look to sell every time the market goes up. The markets are not subject to the laws of gravity.