Don't Be Afraid Of Record Highs

We are hard-wired to worry.

The survival instinct of fear, worry, and concern has been etched into our DNA over hundreds of thousands of years when we were running away from lions and hunting wooly mammoths.

It's why we usually ask the question "What could go wrong?" a lot more than we ask "What could go right?"

Today, we're worrying a lot less about being attacked by four-legged predators and a lot more about securing our future.

Life is pretty good, all things considered!

New highs in the stock market

The Dow Jones Industrial Average hit a record high last week and the S&P 500 is within spitting distance of a new all-time high.

So, that begs the natural question that I have been increasingly hearing over the past few weeks.

Should we start to worry that a sell-off in the stock market is imminent?

I don't think so. Instead, more gains are more likely than a sell-off.

There's a concept in physics that's applicable to investing: momentum.

An object in motion tends to stay in motion.

As stocks make new highs, they tend to continue higher until a negative force derails the momentum.

The combination of a resilient consumer, solid economy, strong jobs market, cooling inflation, and falling interest rates suggests it could take a while before a negative force crops up and derails the current rally in stocks.

Let's look at history

In February 2020, stocks hit record highs, then plunged more than 30% due to the COVID-19 pandemic. By August 2020, stocks recovered their losses, made new highs, and continued to rise 40% for the next 16 months.

In May 2013, stocks hit record highs for the first time since 2007. Over the next 2 years, stocks climbed 35%.

It's been nearly two years since the Dow Jones peaked in January 2022. Ryan Detrick of Carson Group crunched the numbers and found that when the Dow Jones hits a new record high after not hitting a record high for at least a year, as it did this past week, the forward returns are strong.

This scenario has happened 12 times since World War II. Stocks were higher a year later 10 out of those 12 instances, delivering an average gain of 14%.

Finally, consider what happened in 1982, as, similar to today's period, the Federal Reserve declared victory in taming the rampant inflation that plagued the 1970s.

Stocks had been rangebound for years until the stock market hit a new record high in August of 1982. Stocks quickly gained another 17%.

All of this is not to say that stocks are about to soar and now is the time to bet the farm and aggressively buy stocks, or that stocks won't go down from here.

All of this is to say that you shouldn't let new highs in the stock market prevent you from investing.

There's a natural tendency to think "I'll wait to invest once this market moves lower."

But there are two big problems with that very common thinking.

First, if the stock market does in fact sell-off, it will be because of bad news, and that bad news will probably generate enough fear that prevents you from buying stocks at lower prices. "I'll just wait for stocks to go a little bit lower given how bad the news is right now."

Second, the stock market could keep rising before bad news sparks a sell-off, and that sell-off a few months from now could simply bring stock prices back down to today's levels.

History has shown that your probability of gains goes higher the longer you are invested.

So get invested, stay invested, and keep investing. Stay the course and stick to your plan.

If you are worried about buying stocks at new highs, one psychological trick to consider is dollar-cost-averaging into the market.

Simply break up your investment into automated bi-weekly or monthly purchases so you don't even think about it.

🙏 Thank You For Reading!

As always, thank you for reading. It’s a privilege for me to help you navigate today’s uncertainties. Please reach out with any thoughts or questions about any aspects of your financial life.

I am here to help. You can call (607) 882-1434 or e-mail [email protected].

Merry Christmas and Happy New Year!