Read This Before You Call the Top

"The market just did something it has never done before," my aunt told me over the holiday. "I heard about it on the radio. It sounded important."

She's darn smart. But I know she doesn't follow the markets. Still, when she said it, I was worried that I had missed something.

I managed to slip away from the desk for most of the Christmas week. I was still reading the news, though. And I hadn't heard of anything big happening in the markets.

After a bit of prying, I figured out what the "news" was...

The Nasdaq was making new all-time highs. More than that, it had just passed an important-sounding round number... 9,000.

For average folks, the big round number makes this event seem more important. And my family was persuaded by it.

"Looks like we're getting near the end," my uncle chimed in.

I mumbled something about how stocks can go higher than folks tend to imagine, and the conversation moved on. But now that I'm back at the office, I'm still thinking about it.

That's because my family didn't see new highs as cause for celebration. They were cause for fear.

For mom-and-pop investors, new highs are scary. They see it as uncharted territory. And my family worried it was unsustainable.

Now, if you find new highs scary, don't worry. Lots of people feel that way. What you don't want to do is make investment decisions based on this incredibly flawed premise.

Simply put, it's dead wrong to fear new highs. Today, I'll show you why...

As most investors know by now, the U.S. market has been making new all-time highs. That includes both the S&P 500 and the Nasdaq indexes.

Should we worry about that, though? The data gives a clear answer... NO!

To see it, I tested the future performance of stocks after every new weekly all-time high. So, each week the market made a new all-time high, I looked forward to see what happened next.

The table below shows the average of all those results and compares it with the S&P 500's historical average performance. Take a look...

This data goes back to 1963. And as you can see, stocks don't crash after hitting new all-time highs. In fact, they tend to slightly outperform.

So new all-time highs are not a sign of the end for the S&P 500.

And it turns out, the same is true for the tech-heavy Nasdaq. Take a look...

This time, the data goes back to 1971 (when the Nasdaq launched). You'll notice that this market does slightly underperform after hitting new highs. But it's a small underperformance. Again, no apocalypse here.

Simply put, if you're looking for a sign of the top... new all-time highs ain't it. And you're definitely not going to find an imminent crash based on this signal alone.

So, don't let new highs scare you out of stocks. They might seem like a big deal. But in reality, they're business as usual.

Good investing,

Vic Lederman

Further Reading

"The storm clouds of recession are on the horizon," Vic says. It's always a smart idea to limit your risk in the face of danger. But some risk-management strategies can cost more than they're worth... Read more here: Don't Board Up Your Home Yet.

"You can always come up with an excuse to NOT put your money to work," Steve writes. But with stocks at all-time highs, a few simple steps can help you overcome this fear... Get started here: How to Start Out in Stocks – Here at Record Highs.

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Market Notes


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