For Illinois residents, 2024 has been a year of natural rarities, provoking awe and wonder.  First, we had a spectacular total solar eclipse on April 8th, with the path of totality passing through the southern part of the state.  While it only lasted a little over three minutes, it was an amazing, indescribable experience (of course, “eclipse glasses” were worn before and after).  It will be 75 years before Illinois residents experience another one [1].

Second, and considerably less exciting, a double brood of periodical cicadas are now emerging from the ground: the 17-year Brood XIII in the northern half of the state (I can see many of them out my window as I write this) and the 13-year Brood XIX in the southern half of the state.  It won’t be long before we start hearing the loud mating calls of untold thousands of male cicadas. The last time this happened was 221 years ago [2].

Meanwhile, this month in the financial world, we also witnessed something unusual (fortunately with no risk of either blindness or deafness):  Record highs were achieved in the S&P 500 Index, the Dow Jones Industrial Average, NASDAQ 100 Index, gold futures and copper futures.  All this happened within days of each other [3].

Some investors, hearing this news, will begin to feel anxious, fearing that new market highs will be shortly followed by significant declines.  This has always mystified me.  A robust stock market such as we have had here in the U.S. over the past 80 years would have to notch higher and higher index levels simply as a mathematical outcome of the growth of wealth creation which has annualized 10.5% per year (for the S&P 500 Index) [4].  Something would be seriously wrong with a market like this that didn’t achieve record index levels with some frequency.

However, as we have repeated on numerous occasions in this space, historical stock market returns are not linear (if they were, we would have a tiny new record high every day!).  Market volatility is a constant risk.  As Warren Buffett’s mentor, Benjamin Graham, once said: “In the short run, the market is a voting machine but in the long run it is a weighing machine [5].”  What does this mean?  Seen on a daily, weekly, monthly or even yearly basis, the market can exhibit wide swings in its value, often driven by human behavioral impulses, such as fear and greed, but over much longer time periods, the market approximates a reasonable fair value.

This is not to say that markets can’t experience prolonged periods without breaking to new highs (a.k.a. Bear Markets).  The first chart below shows the number of all-time highs (end of trading day) by decade for the S&P 500 Index since 1950[6].  

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The second chart shows all-time high days as a percent of all trading days year-by-year, since 1952 (there are between 250 and 252 trading days each year in the U.S.).  So far this year, almost one of every four trading days for the S&P500 achieved a record high [6]

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Since 1952, new market highs have occurred on average about 7% of the annual trading days; but notice that they are not distributed evenly.  They tend to cluster during bull markets, most evident in the late 1990s during the Tech Bubble.  In 1995, for example, almost every third trading day notched a new record.  

Also obvious are the two extended bear markets of the 1970s and the 2000s.  The ‘70s had the OPEC oil embargo, stagflation, the Vietnam War, and Watergate, among other things, as the market lost half of its value since hitting a high in 1973.  The 2000s, known as the “Lost Decade” when the S&P 500 Index returned -1%, had two bear markets associated with the collapse of the Tech Bubble and the Global Financial Crisis.

Even with these bull and bear markets, the steady but uneven march of new highs are evident in this event timeline of the S&P 500 Index since 1928 (logarithmic scale) [8].

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But how do we respond to those who experience “new market high anxiety”?  Are new highs always a signal that stocks are overvalued?  This chart compares the theoretical investment outcomes if you had invested on any given day versus only days where the S&P 500 closed at an all-time high since January 1, 1988, to August 27, 2020 [9].

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Here we see that investing only on days when the market closed at an all-time high actually outperformed investing on any other day, at least over this 32-year period.  One reason for this is that markets can exhibit a momentum effect, both in bull markets and bear markets.  This is, markets that go up, often tend to keep going up.  This happens for behavioral reasons, as more investors pile in as markets, due to over optimism, herding or or FOMO [10].  Excessive pessimism and herding can push markets the other direction also.

Using this historical perspective on the capital markets, the observed steady (but uneven) upward march of the stock market over long time periods should help investors to stay the course with their asset allocation.  Unlike a rare total solar eclipse or the emergence of a double brood of cicadas, new market highs have happened with some regularity and this should come as no surprise to experienced long-term investors.

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[1] https://en.wikipedia.org/wiki/List_of_solar_eclipses_visible_from_the_United_States

[2] https://cicadas.uconn.edu/

[3]Wsj.com

[4] Matrix-Book 2023, Dimensional Fund Advisors

[5] https://fs.blog/mr-market/#:~:text=As%20Ben%20said%3A%20%E2%80%9CIn%20the,increasing%20at%20a%20satisfactory%20rate.

[6] https://www.plantemoran.com/explore-our-thinking/insight/2024/02/how-common-are-all-time-highs-for-stocks#:~:text=As%20shown%20in%20the%20chart,in%20every%2020%20trading%20days

[7] Bespoke Investment Group, LLC

[8] Bespoke Investment Group, LLC

[9] https://awealthofcommonsense.com/2024/02/all-time-highs-usually-lead-to-more-all-time-highs-in-the-stock-market/

[10] Fear Of Missing Out