Last Update: July 2021

For many rookie traders, the news of the market hitting all-time highs brings fear and anxiety.

It’s quite curious, really.

Rather than greeting such cheery news with optimism, they see it as a sign of the market’s impending doom.

To support such a gloomy outlook in the midst of record stock prices, platitudes aplenty are thrown around like, “ya gotta buy low sell high”, “the market is cyclical”, or my particular favorite, “what goes up must come down”.

My goal today is to provide some perspective on how to think about the stock market when it’s perched at an all-time high. No doubt you’ve heard of the bears’ arguments for why caution is warranted. Allow me to throw out an argument or two in support of optimism and a bullish view when the market appears to be in nosebleed territory.

Side note: I’m always on the lookout for those arguing against my market beliefs. If I’m a raging bull I want to know what the bears are saying. If I’m a super bear I want to know what the bulls are arguing. Upon hearing the other side I’m either going to conclude, “those guys are a bunch of idiots; and, having heard their weak sauce arguments, I’m now doubly convinced of my position”, or “gee, those are some convincing points; perhaps I should modify my outlook.”

All-Time Highs, Get Used to It

Here’s a stat I bet few have heard. But, allow me to preface it with a question. How often does the U.S. stock market make a new all-time high?

Once every five years?

Once every year?

Once every six months?

Once every three months?

Once every month?

No way it can be even more frequent than that, right?

Wrong!

Since 1926 the stock market has reached an all-time high every 18 days. Far from being abnormal, the market notching new all-time highs is commonplace. It happens literally all the time.

Just so there is no confusion 18 days is the average. That means sometimes the market registers new all-time highs day after day after day. And yes, other times it may take years before reaching a new high. On average, however, the market has forged into unseen territory roughly every 18 days.

Impressive, no?

I suspect the biggest culprit for the Pavlovian response of panic brought on by news of all-time highs these days is the fact that we just experienced a particularly vicious 13-year secular bear market where all-time highs were extremely rare.

It would be a mistake, however, to use the past decade as a template for what’s typical on Wall Street. You simply need more data, a longer time horizon to figure out normal behavior.

Most of us fall prey to recency bias when forecasting. That is, we allow the recent past to have too much sway in coloring our opinion going forward. If all you know is the stock market from 2000 to 2010, you probably think it’s a tumultuous beast hellbent on making investors weep. On the other hand, if you just experienced the raging bull market of the ’90s, you’d conclude stock investing is the easiest game in town.

As usual, the truth lies somewhere between.

Here’s the bottom line: Those who view new highs with trepidation either don’t have a good grasp of history or their willfully choosing to ignore it.

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