These Market Highs Won't Last Long

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By Vista Capital Partners

Don’t let the headline scare you—we’re not predicting a big market crash.

But we do want to provide some perspective on what’s become a hot topic in the financial press this year. On August 11, three major market averages—the Dow Jones, Nasdaq Composite and S&P 500 Index—each reached a record high. This is the 8th new record for the 30-stock Dow Jones Industrial Average this year; the S&P 500 Index of large U.S. stocks has reached an all-time record on nine occasions.

Despite the wealth these new highs have created, many investors remain nervous. Why? The new highs themselves. The 7-year bull market for U.S. stocks—the S&P 500 is up nearly 250% since March 2009—has many thinking returns have been too good for too long. Don’t today’s record levels increase the odds of negative future returns?

No. As we’ve written before, a new market high doesn’t tell us much about future stock returns.  What we do know for certain, however, is that in the months and years following a new record, stock markets have gone on to reach even higher levels far more frequently than they’ve pulled back.  Betting on a market crash after a new high, as the graphic below shows, simply hasn’t paid.

Besides, not all parts of the stock market are hitting new highs. Yes, both the price level and price-earnings ratio of the S&P 500 are above their historical averages. But significant portions of a well-diversified Vista portfolio aren’t anywhere near as pricey. For example, the stocks of small value companies in the U.S., international and emerging markets remain at, or near, their average valuations over the past decade.

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