People with investments might be experiencing a bit of whiplash.
Thursday’s market drop, the biggest decline in the Dow Jones industrial average in three months, came on the heels of seemingly routine headlines blasting: “Stocks hit all-time highs”
For much of the summer you’ve likely been elated as equities have continued to charge ahead in the second longest-running bull market since the end of World War II. The Dow Jones industrial average is up nearly 10 percent since the beginning of 2017.
But you may also have experienced a touch of fear because, well, that bull market has to run out of steam sometime. Each new peak represents the prospect of a market top and then a 20 percent decline — in other words, a bear market.
The S&P 500, a broad-based index of the nation’s largest publicly traded companies, has closed at a new high some 30 times this year. That’s more closing highs than we’ve seen during many entire years, says Sam Stovall, who tracks those numbers as chief investment analyst at CFRA.
Does all of this mean it’s time to cash in? Is the market still frothy? Should you sell now?
Stay the course, history suggests
First, a little perspective. Markets only dropped only a percentage point or so Thursday, not exactly a Black Monday moment.
And as for all those all-time high figures you were reading about until recently: While it’s true that there have been more than two dozen record-breaking days for the S&P 500 thus far in 2017, that’s not terribly high compared to some years.
“Even on an annualized basis, 2017 would rank below 1995 (77), 1964 (62), 2014 (53), and 1961 (52),” notes Stovall.
The current bull market might even seem rather humdrum when you consider that the S&P has reached only half as many new highs as seen during the market’s longest boom since WWII: the “go-go ’90s.”
Though the history might seem reassuring, some market experts have been blaring their air horns.
Bond guru Bill Gross, portfolio manager at Janus Henderson Investors, recently said markets are now at their riskiest point since the 2008 crisis.
“Money is being pumped out into the system, and money that is yielding less than nothing seeks a haven not only in bonds that are under-yielding but in stocks that are overpriced,” Gross told Bloomberg.
Meanwhile, a measure developed by Nobel prize-winning Yale economist Robert Shiller indicates stocks have gotten about twice as expensive as their historical norm.
Take a long view
Still, there are plenty of reasons to keep riding along, with your seat belt fastened firmly.
Market crashes, or at least bear markets, are the result of big events — like recessions — rather than frothy stock prices.
Also note that the Shiller indicator has been above its long-term average for a while now. And, you should see signals of economic weakness before you start to sell — signals that aren’t quite there yet.
So avoid the headlines if they make you feel queasy, and stick to your long-term strategy. Don’t change course simply because stocks are rising — or falling. But certainly, keep some cash in a safe place, like a money market account.
Trying to time the market is how investors develop the nasty habit of buying high and selling low.