What Do Market Highs Mean?

Upward Downward SpiralWith the U.S. stock market setting new record highs almost every week, investors wonder what this means for future price levels. It is a good question and the answer is very clear. If one looks at market data after new high levels are reached, the likelihood of the market being still higher 6 months or 12 months later is about the same as the percentage of the time the market is up overall…about 70-75% of the time. Therefore, new highs don’t tell us much one way or the other about future prices.

We all want to know what tomorrow will bring. If we look at the weather forecast, the most likely weather tomorrow is what the weather was today. The same holds true for the stock market. It is tempting to sensationalize possible outcomes at times like this but long term investors know they need to stick to their plan. Run, don’t walk away from so called “financial advisors” that tell you they have a strategy for being in the market when it is doing well and out when it is not.

Many investors fall under the delusions of market timing and stock selection. It is what fuels the large financial services firms (brokers/banks/insurance). Plainly put, it is a fairy tale. There is no one who can “circle the date” when price increases might reverse.

Something that should be done after a good run-up in values is portfolio re-balancing. If your target portfolio allocation is 60% stocks/40% fixed income and you are now closer to 75% stocks (because stock prices have increased more rapidly than your fixed income holdings), now is the time to selectively sell positions and re-balance back to your target. Assuming your overall target allocation is appropriate, resist the urge to do nothing because “everything is going so well”.

In previous market swells, we have seen otherwise reasonable clients come in and say “if 60% stocks is good, then 90% or even 100% stocks must be better”. This is a dangerous attitude and fails to take into account the emotional difficulty many investors have hanging on when the inevitable market pull-back occurs. Trust me…it will; and trust me on this point also, it won’t last.

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