by Brad McMillan, CIO, Commonwealth Financial Network
This morning, I saw a commentary piece that pointed out we have had 12 record highs for the S&P 500 in the past month. A record is usually a big deal, and I often get calls to comment on what it all means. But I have to admit, I did not realize there had been that many in the past month. So, what does this series of highs mean, if anything?
Not magic, just math
In line with my usual policy of being the onion in the fruit salad, I donât think it means all that much. If you think about it, every time we hit a new high, every single high after that is also a new high. And, if the market keeps moving higher over a month or more, that means we get a lot of new highs. Nothing magic, just mathâand common sense.
Looking at history bears this idea out. When the market hits new highs, it may go higher. Then again, it may drop. Generally speaking, a string of new highs reflects both optimism and strong demand for stocks, and that trend is likely to continue. But that trend is usually the case, and it has nothing to do with a series of new highs.
A blow-off top?
Another contrary meme that is spreading is that the string of new highs means the stock market is now approaching a blow-off top, when it runs up and then collapses. I have a little more affinity for this one (it speaks to the onion in me). This theory is also consistent with some of the things we have seen recently, such as the collapse of WeWork. But here, too, the historical data simply doesnât bear it out. We didnât see similar behavior, for example, before either the 2000 or 2008 crashes. It makes a great story, but the data simply doesnât support it.
Looking at the âfactsâ
And that, I think, is the real message of this series of highs: we can view it as a great story, and use it to illustrate whatever point we are trying to make. But when you actually look hard at the data? You find nothing.
Many of the stock market âfactsâ follow a similar pattern. Something may have happened once, and forever after that âfactâ will resonate. But we must consider whether there is a real reason underneath these so-called facts. If not, it is likely coincidence or, as in this case, simple math. The underlying cause is not always obvious, as with the seven-year market cycle. If you look hard enough, you should be able to find it. If not, be very careful how much you rely on that indicator. As always, however, it isnât that simple. Some stock market facts do indeed seem to hold consistently, without a visible or even hidden cause. If so, you might want to rely on them (again, be very careful).
If this type of thing was easy to figure out, everyone would be doing it. With the string of new records, it does seem to be easyâand maybe everybody is doing it. Which would be characteristic of a blow-off leading to a market top.
Whoops. We've come full circle!
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Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation's largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth's investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.
Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results.
Commonwealth Financial Network is the nation's largest privately held independent broker/dealer-RIA. This post originally appeared on Commonwealth Independent Advisor, the firm's corporate blog.
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