Investing

New Highs

You may or may not have heard but the stock market has recently made new highs. There’s no way you missed this news if you pay any attention to the likes of CNBC or Bloomberg. Contrary to what you may have heard, the stock market making new highs is not a bad thing. Often times, pundits and commentators are looking for something to worry about. New stock market highs in the context of whatever is concerning at the time are a prime worry target.

Admittedly with all the anticipation leading up to a new market high, the attainment of a new high can feel anti-climatic, sort of like 12:00am on January 1 of any year. There’s all this build up and then when you actually reach the new high or 12:00am on January 1, there’s a subtle sense of disappointment. Everything leading up to the climatic point was exhilarating but once you get there it’s kind of a let down.

Let the Good Times Roll

Unlike ringing in the new year, when the stock market makes new highs there’s usually more to come in not too short of a time. New stock market highs come in bunches and tend to be very positive on a look forward basis. In July so far, the S&P 500 has made six new highs

In 2019, the S&P 500 has made 11 new highs. That’s pretty remarkable when you consider the 20% drawdown in 4Q18 from the previous peak. In other words, on 12/24/18 (the low point), the S&P 500 was 19.8% below its previous high achieved on 9/20/18. As of yesterday’s (7/16/19) close, the S&P 500 is 27.8% above the 12/24/18 trough!

Context

While there’s no guarantee the market will continue to make new highs, especially given the length of the current bull market, now is not the time to be bearish. Below we display the number of new highs the S&P 500 made each year since the trough levels of the last recession in 2009. Note that most of these new highs occurred in close proximity to one another. Interestingly, looking at the last cycle leading up to the Great Recession there were only eight new highs made in the nearly four years leading up to that peak and they were all made in 2007, which from a convenient narrative perspective supports the claims made that that particular cycle was financially engineered and not fundamentally driven. The new high trend during the 1990s bull market is more similar to this bull market’s trend although this time around the bunching up of new highs is more concentrated. I’m not sure if that means anything but it is a noticeable difference. One thing that stands out to me is the declining frequency of new highs as the market got closer to cyclical peak levels. Looking at the new highs trend in today’s market could certainly suggest we’re approaching this cycle’s peak.

While nobody can predict when the eventual peak for this cycle will be reached, it’s good practice to stay invested and to remember that new market highs are almost always a good thing and the stock market usually doesn’t fall off a cliff after reaching new highs or even cyclical peaks. It’s much more of a gradual decline once the downtrend to a cyclical trough begins.

There were 637 trading days in between the market peak in March 2000 to the eventual cyclical trough in October 2002.

There were 353 trading days between the market peak in October 2007 to the eventual cyclical trough in March 2009.