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The U.S. stock market, as measured by the Standard and Poor’s 500 index, set a new all-time record high last Friday, marking the official start of a new bull market. The S&P 500 benchmark index closed at 4,839.81, eclipsing the 4,796.56 record set just over two years earlier on January 3, 2022.
A bear market is often defined as a decline of 20 percent or more, and the bear market of 2022 is a now a distant but painful memory. Today unemployment is low, inflation is falling, and the talk of recession is fading. I’m seeing that people are more optimistic about the stock market, though I don’t share that optimism. Here is why you shouldn’t get carried away by an all-time high. For one thing, they aren’t that unusual.
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According to Bloomberg, the S&P 500 index has hit 1,176 all-time highs since 1957. I counted 140 all-time highs in the last five years alone. The only thing different about this record high is that it’s the first record high after a bear market.
But markets are mean reverting, which is a fancy way of saying neither good times nor bad last forever. Bull and bear markets are part of the nature of the stock market, and your best strategy is to avoid chasing performance. Figure out how much you want in stocks and stick to it.
It’s not as easy as it sounds. Think back to the news and how you felt back around October 12, 2022. Inflation was running rampant and both stocks and bonds had plunged and recession predictions were numerous. Better yet, go back to March 23, 2020, when COVID changed our lives and stocks had fallen by nearly 35 percent in just 33 days. While nobody knows at the time when stocks have bottomed, the market was on sale during those periods, yet few were buying. The total returns of an S&P 500 index fund bought on those two dates were 38.1 percent and 130.4 percent, respectively.
What should you do?
First, remember that dividends play an important part of your total return from the stock market. On a total return basis — including dividends — the index reached a new high well before Jan. 19. According to S&P, 403 issues in the index — about 80 percent — paid a dividend last year.
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