Comments provided by Grant Engelbart, Investment Research Analyst
As the Dow surpassed its all-time high last week, CNBC had a heyday blasting various orange ‘warning’ signs and ‘countdowns’ and what-not, enticing retail investors. To the informed investor, this should almost seem a fluke. The Dow of course only contains 30 stocks, but yet is synonymous with the ‘market’ to many investors. Many investors jump on the bandwagon when they see headlines like this. Joe Schmo opens his quarterly statement and sees stocks are doing well and then decides to pile in. Who buys at the top?! They are crazy right?
Well, maybe not so much. Turns out the week, month, and even year after the Dow reaches a new high, returns are positive over 60 percent of the time. The most compelling statistic is that one year after a new high where, on average, the Dow is 9.4 percent higher 70 percent of the time! This data goes back to 1906 when the Dow hit 100 for the first time. To the long-term investor – which is definitely anyone who makes investment decisions based on their quarterly or annual statement – this is particularly relieving.
I was a bit stumped by these statistics. I thought for sure that on average a week or month after an all-time high the market would have corrected. I don’t think it’s a stretch to think many in the investment industry feel the same way. Why? The sting of 2008 is still prominent. The last time the Dow reached an all-time high back in 2007, a year later it was down 35 percent…. That kind of memory scares people. However, never in history has the Dow fallen more than even 25 percent after an all-time high (prior to 2008).
As we all know, the media loves to spin things one way or another, and most of the time that way is negative. Don’t be surprised to see a stat looking at the market the last time it reached an all-time high, however, history has shown that kind of black swan is unlikely to repeat. It is natural for the market to correct, however unnatural for it to crash. Oh did I mention the P/E ratio of the Dow is nearly 20 percent below the last peak? We may still have some room to run in the months to come.
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