I pulled out my smartphone the other day to view some of the morning’s headlines while waiting for my chicken salad powerhouse wrap (detail added so that you knew I wasn’t driving while reading). Here’s the first line that showed up:
“Dow 20,000 is coming this year…”
My first thought was how funny this headline is. (By the way, for the wise investor who doesn’t track the Dow—the level is around 18,300 as of this writing). Can you imagine the news predicting such a higher market this year just weeks ago when the market sold off by almost 1,000 points (before coming back a few days later)?
This got me thinking about the equity market’s recent “all time high” that is continually making headlines (again). As investors, we have to be careful with what information we’re taking in, and how our perceptions can influence the expectations we have with our own portfolios. A little more than three years ago the same thing was being reported. As the market recouped all of its losses from the ’08-’09 downturn (on a point basis) and began to touch new levels that year, all we heard about was the market’s new high—each time it happened—until a more enticing headline came along.
It’s kind of like having the Baltimore Sun report front page news about how the leaves on trees surprisingly emerge with such brilliance—every single spring. I can see the paper now: “Leaves Are Back, And Greener Than They’ve Ever Been—But For How Long?!” …followed later in the year by the equally astonishing headline “Trees Losing Their Leaves; Experts Say There Is No End In Sight”.
Okay, I’m having fun here, but isn’t it similar? We intuitively know that seasonal changes happen and are even necessary for our tree’s growth trajectory over time. We live with it (and in my case, enjoy the visual fireworks in Maryland more and more each year), and we know that it’s just part of nature’s evolution. The only difference with the leaves analogy and the markets is that we know the timing of the patterns that emerge each Spring and Fall, making the change predictable. The markets, however, are simply vehicles to set the price of securities between a buyer and seller. And we can’t know what every buyer and seller across the globe is going to do (and at what price) based on events that we can’t know about (since they haven’t happened yet). What we do know is that businesses in the aggregate advance over time, and the price of the majority of those business’ stock advance as well. As those businesses and their price for a piece of them (their stock) advance, it will be natural to eventually enter into new and higher price levels—that’s just how it works.
To provide more perspective on the market’s “all-time highs”, here is a history of the Dow Index each time it reached a fresh new peak:
-First reached 100 points (100!) in 1906
-First hit 500 in 1956
-First reached 1,000 in 1972
-First crossed 5,000 in 1995
-First hit 10,000 in 1999
-Crossed 15,000 in 2013
This happened while we’ve had downturns, wars, recessions, elections, and every other catastrophe you can think of. Businesses are in business to advance, grow their revenues and profits over time. Not all will, and that’s why we diversify. Over time investors are willing to buy pieces of those businesses at higher prices. With patience, we benefit from this growth over time. Of course, there are no guarantees with investing in equities, and we understand how headlines can tempt us to get off track occasionally. But please, when you have that next “what will the market do next?” thought, and if that thought makes you nervous about your own investments, pick up the phone and call us—that’s what we’re here for. And if you don’t have a thought-out, coordinated investment plan that makes sense to you, feel free to call us and we’d be happy to provide you with some guidance.
Past performance is no guarantee of future results. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this or any other newsletter.
Pete Dixon, CFP®
Partner and Advisor