Steep declines in the stock market often follow periods of extreme enthusiasm and growth. The bear market of 2001, for instance, was preceded by a long surge in stock prices during the dot-com boom.
Market highs can drive mixed emotions. When the market hits new all-time highs, as it did recently, investors are pleased with their rising portfolio values but often worry about what lies ahead. The good news is that scary episodes such as the dot-com bubble are not
representative of average results.
Since 1926 the five-year average annual return on the S&P 500 Index was 10.3 percent. In five-year periods that followed all-time market highs, the average return was nearly identical at 10.2 percent (see chart 1).
The U.S. stock market has often delivered positive returns over five-year periods, regardless of the market’s current state – be it high, low, or somewhere in between. Today’s prices simply reflect today’s estimate of value. Attempts to predict future returns based on current values often fail because future values will be driven by new information. In short, a stock market high does not necessarily signal an impending drop off a cliff.
Although it may feel counterintuitive to buy into a market that has already achieved record levels, it is essential to bear in mind that all-time highs are often indicative of robust underlying fundamentals and optimistic market sentiment. Investing at such junctures requires ongoing discipline.
Also In This Issue
Quarterly Market Review: Bulls In Charge
Amazon Joins The Dow
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles
