What to Glean From the S&P 500’s New Record High

And there it is! The S&P 500 price index closed at 4839.81 Friday, eclipsing the close on January 3, 2022—and officially completing the round trip from that year’s bear market.^[i] In our view, milestones like this are fine to note but largely meaningless. A new bull market’s first all-time high is usually one of dozens, if not hundreds, along the way to its ultimate peak. But this is still a fine time to impart some timeless lessons.

First: There is never an all-clear signal. When stocks reached their low in October 2022, there was no way to know a new bull market was underway. There was no siren or signal to mark the official low in real time. All the fears dragging down sentiment that year were still in place. Inflation was still elevated, the war in Ukraine continued, the Fed was still hiking and supply chains weren’t back to normal. Recession fears ran rampant. Moreover, because the bear market was relatively short in duration and hadn’t yet seen that panicky burst of indiscriminate selling known as capitulation, many experts argued the bottom couldn’t be in yet.

But it was in, making this the rare bear market that ended without capitulation, much like 1966’s (which was also similar in length and magnitude). Many are only now calling the rally since then a bull market, apparently feeling liberated to do so now that a new high has provided a very late, lagging confirmation. But stocks have actually been in a bull market for over 15 months, erasing the bear market’s declines for those with the patience, discipline and fortitude to remain invested and focused on their long-term goals the whole way.

This is the second lesson. Of course, the ideal is to avoid down markets, or at least a good chunk of the downside. Sometimes that is possible, if you identify the bear market and its drivers early enough. Sometimes it isn’t. And in those unpleasant sometimes, capturing the rebound is crucial to reversing the declines—which means gritting your teeth and hanging on. It is a true test of will and nerves.

But if there is no all clear, how do you know hanging on is the correct move? We think it is most helpful to take a cold, unemotional look at everything going on in markets. All the bad news and what people are saying about it. And then, ask this question: Is there much negative surprise power left here? Followed by: How likely is it that people who want to sell stocks because of this bad news haven’t done so yet?

Taking this approach in October 2022 wouldn’t have yielded clear-cut conclusions, but it helped frame probabilities. At the time, all the negatives in headlines were the same ones that had taken turns stinging investors throughout the year, making it likely that stocks had already given them ample consideration and most people had already traded on them. This made it likely stock prices already reflected these fears to a very great degree—if not fully—making it unlikely that they had power to sink stocks to much deeper lows from there. A recovery looked likelier to begin at some point soon than another -20% drop.

This framing didn’t hint at timing, but for long-term investors, we don’t think timing is really the point. Yes, in the short run, it can matter a great deal to your feelings about the market, especially for those who started investing near the peak. But what ultimately matters is getting the returns needed to reach your goals, whatever they may be, over your entire investment time horizon, which could be decades-long depending on your age and your money’s primary purpose. So if stocks look likelier to be up than down over the next year or two, then owning stocks is wise even if you can’t pinpoint when the rally will start. The destination is what matters.

Which brings us to lesson the third: All-time high isn’t synonymous with peak. This is crucial to keep in mind now, as the investing world seems to be suffering a collective case of what we call breakevenitis. That is, now that stocks are back to the prior high, many question how much further they can go and whether it might be wise to take some money off the table now just in case of a fresh downturn. Yet most bull markets extend long past their first new high, setting many more records as they zig-zag higher. None of them are predictive—all are backward-looking, telling you only where stocks have been. Assessing whether any high is the bull market’s last requires looking past index price levels to investors’ expectations and how those square with what economic and political conditions look likely to mean for earnings over the next 3 – 30 months.

Right now, this balance looks quite favorable for stocks. Investors seem quite skeptical, and fearful headlines have built a nice wall of worry. Meanwhile, most governments are gridlocked, keeping legislative risk low. This, plus the dawning realization that we avoided a US and global recession should help spur risk-taking and investment, fueling growth over the foreseeable future. The landscape isn’t perfect or devoid of risk, but it doesn’t need to be. Stocks thrive on better than expected, and this looks likely to keep powering returns for the foreseeable future.