Is the Market Heading for a Fall?

http://www.dreamstime.com/royalty-free-stock-images-falling-stock-market-words-image21464539Recently, when scanning through a financial news website, I noticed that about half of all the articles related to, in one way or another, the coming stock market fall. The not-so-subtle implication is that the market has nowhere to go but down.

A quick glance at equity mutual fund activity shows a huge increase this year. During the first half of 2013, investors added a net of $92 billion to stock funds. For context, during the same period in 2012, investors withdrew a net of $180 billion from equity funds. If “Mop and Pop” are back in the market, then it must be getting late. Right?

 

Markets Go Up and Down…

As our clients (and other readers) know, we have a saying here – “Markets go up and down, not up and up.” Without a doubt, the broad U.S. stock market has been on a tear, with the S&P 500 index up almost 20% year-to-date. Stock prices have busted through the previous high levels set 5 years ago on the eve of the so-called “tech bubble”. Do market highs really tell us the market is setting up to fall? Should this really matter to long-term investors?

Looking at market data for the past 50 years, after reaching new highs, stock prices were even higher one year later 72% of the time. This happens to conform fairly closely with the percentage of the time the market us up anyway. So this is not predictive. High markets can go even higher.

Performance of the S&P500 Index (8.2013)

This chart details, in simple form, the performance of the S&P 500 from 1970-2012. A fundamental requirement for receiving stock market returns is that you actually have to be in the market… not on the sidelines. The chart reflects the market return for the period, and then returns if only a few days are missed. The lessons here are profound.

Market history suggests declines of at least 15% occur every 3 or 4 years on average. There is no reason to believe that has changed. Neither is there any reason to believe that any of the laundry list of perceived and imagined problems in our economy create obstacles for the markets that have not been encountered previously.

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