The S&P 500 hit a new all-time high on April 30th. This was a big comeback from the correction we experienced during the fourth quarter of last year. On Christmas Eve last year, the S&P had fallen 19% from its previously high. Now that the market has recovered, should one think about selling because of the new all-time high?
The goal of every investor is to buy low and sell high. It sounds easy enough, but selling when the market is high, means you forego any future gains. You might be able to sidestep a modest correction now and again, but given enough time, the market generally goes up over time.
However, if we look back at history, there have been periods when the stock market was flat for as long as an entire decade. The period between 2000 and 2010 is even called the “Lost Decade”. During that period the economy experienced two recessions and two large bear markets. Since 2010, the market has more than tripled, which brings us back to the original question. Should someone think about selling because of the new all-time highs?
The History of New All-Time Highs
The chart below shows a 50-year history of the S&P 500 going back to 1968. The red dots indicate each day that the market hit a new all-time high. The areas on the chart that are shaded in grey are periods when the economy was in a recession.
Here are a couple of noteworthy observations:
- The market can continue to make new all-time highs for years. During the 1990’s, the S&P continued to make new highs for the better part of a decade. Similarly, since 2013, the S&P has been making new-highs for a number of years.
- A run of new all-time highs is often interrupted by the economy entering a recession. If a recession does not occur, the market’s winning streak is likely to continue. We will have corrections like we saw late last year, but they tend to be short-lived and reward those investors who can hold on and stay invested.
If you’re thinking about selling because the market is back near all-time highs, consider this: in February of 1991, the S&P hit a new all-time high at 369.02. Before that bull market ended in 2000, the S&P would more than quadruple to 1527.46 (314% gain) and make an additional 307 new all-time highs.
During the current bull market, the S&P has made 211 new all-time highs, and is currently 87% above the first all-time high it set back in 2013.
The big question is whether or not the US economy will enter a recession in the near future. As the chart above illustrates, recessions cause some of the biggest declines in the stock market. Our Business Cycle Indicator has a solid track record of anticipating when a recession is likely to occur. At the moment, it is not providing any dire warning about the health of the economy.