Last year, when the S&P 500 moved into all-time high territory with momentum, a trader friend or two asked for my view on what to short. It wasn’t “if” to short, it was literally “what” to short. The sentiment there was that the market surely couldn’t sustain that level and, therefore, virtually had to come crashing down. Since the data we track suggested otherwise, I had nothing to offer in response.
Fast forward a few months and many of our clients remain perplexed by the market’s resilience, as if it defies reality, or commonsense even. Well, it certainly doesn’t defy Newton’s first law of motion, and, frankly, it doesn’t defy market history.
I’m thinking this the–market’s-gotta-come-down-because-it’s-at-an-all-time-high attitude stems from a form of “recency bias”. Most often that term is associated with chasing returns: I.e., the market’s been up recently, so it’s going to keep going up, so I should invest my money (come to think of it, that sounds like Newtonian physics). But here I’m thinking of it in terms of the association of market action to all-time highs over the recent past.
Case in point: here’s a look at the 2000s decade: click charts to enlarge…
Yep, only 13 all-time highs during the entire 10 years. A 10 years that captured two of history’s great bear markets. Coming out of that, absolutely!, it would be instinctive to doubt the sustainability of an all-time high.
Ah, but the market’s got a lot of history to consider, and the 2000s were anything but the norm.
Believe it or not, the 50s saw 288 all-time highs:
Followed by the 60s with 205:
Followed by the 70s — which resembles the 2000s — with only 35:
Followed by the 80s with 192:
Followed by the 90s with 306:
And the current decade, following the 00s’ paltry 13 all-time highs, with north of 120 thus far:
So, since the beginning of 1950, with the S&P 500 at 16.66, the index has seen some 1,146 all-time highs — while closing today at 2,440.
Clearly, all-time highs by themselves (particularly following a decade with a dearth [read 80s and 90s following the 70s]), are anything but reasons to run for the exits.