Over the last 8 trading days, the S&P 500 Index has reached 4 new record highs. That is fairly rarified air.
Since January 1, 1951, there have only been 1,161 trading days on which the S&P 500 reached a record high. That is less than 7% of all trading days.
This means that an undiversified portfolio holding only U.S. large cap stocks would be worth less than its peak value 93% of the time. Not very uplifting is it?
Just to pile on to this statistical negativity, it is far more common for the S&P 500 to be in a so-called bear market (more than 20% below its peak) or a correction (10% to 20% below its peak). Bear markets make up just over 18% of trading days since 1951 and corrections are another 20%.
In fact, the S&P 500 has been more than 5% below its all-time high more than half of the time since 1951.
Why the barrage of reality today?
Oftentimes when the media and traders are focusing on record highs they tend to forget about risk. While I encourage you to enjoy the up that brings record highs, we also need to remember that stocks are prone to unpredictable and occasionally lengthy fits of down.
For this reason our client portfolios are structured so that assets that will be converted to cash flow in the short-term are not invested in stocks. Stocks are for long-term goals (generally 8+ years) only. That way when stock traders decide that “down in the new up” we have time for them to change their minds again. The patience that comes with time is a key ingredient for successful long-term investing.
The recent record highs are not reflected in Mr. Market’s mood. According to IAG’s Market Mood Meter©, his mood has gone from Confident to Upbeat over the last week. Trend strength is at 100% (48 points out of 48), but Momentum strength continues to weaken and is now at 42% (20 out of 48 points). Volatility expectations have risen over the last three days.
Securities offered through LPL Financial. Member FINRA/SIPC. Financial advice offered through Investors Advisory Group, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
The S&P 500 Index is unmanaged index of 500 U.S. large cap stocks. Investors cannot invest directly in an index.
Past performance is no guarantee of future performance. In fact, the opposite can be true. The information contained in this report does not purport to be a complete description of the securities, markets, or development referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.
Market Mood Meter© Trend strength is determined using S&P 500 Index daily moving averages (DMAs) (8-21, 13-34, 21-55, 34-89, 55-144 and 89-233) to determine whether the short-term DMA value is higher than the longer-term DMA value. A daily moving average is the average price of the index over the indicated number of days. Trend is either Positive (8 points) if the short-term DMA is higher, Negative (0 points) if the short-term DMA is lower or Transitioning (4 points). A trend is Transitioning if the difference between the shorter DMA and longer DMA is between -.34% and +.34% of the shorter DMA. Maximum is 48 points when all trends are Positive.
Market Mood Meter© Momentum strength is determined using the same S&P 500 Index DMAs to determine whether trends are getting stronger or weaker calculated by dividing the difference between the shorter DMA and longer DMA by the shorter DMA. Momentum must be directional – rising or falling -- for 5 consecutive trading days to be Gaining (8 points) or Losing (0 points), otherwise momentum is considered Transitioning (4 points). Maximum is 48 points when all momentum is Positive.