Over the past 18 months, we have dealt with one headwind after another, yet markets have barely blinked and continue to set record highs. Even with the onset of the pandemic, delayed stimulus bills, a highly contested election, the emergence of the Delta variant, and the most recent gridlock in Congress, markets are wrapping up one of the best 19-month stretches in history!

I know what you’re thinking: “Of course markets are rallying after a horrendous ~34% decline last year!” It’s true a rebound was expected, but the amount and speed of the rebound were not.

As a reminder, in the Great Financial Crisis, it took most equity markets a minimum of five years to recover to where they were before the crisis took hold.

What we are experiencing today is far different. The S&P 500 is up over 110% since the lows experienced in March 2020.

Even more impressive are the gains since the start of 2020. The S&P 500 is up 45.25%, which includes the ~34% decline in Q1 of 2020.

Many are left wondering how markets can be so far ahead of where they were even before the pandemic started. This led me to the question, just how often are markets at or near all-time highs? And have we become conditioned to assume that when markets reach all-time highs, a sell-off is around the corner?

Investing at All-Time Highs

Generally speaking, rising equity markets equate to a healthy economy coupled with growing corporate profits. While this picture should be viewed as a positive catalyst, it is often met with skepticism and talks about a looming market correction. Investing can be hard, and emotions can get the best of us.

Now, to be fair, things changed after the Great Financial Crisis. A growing and thriving economy seems to be secondary as more emphasis gets placed on the seemingly endless supply of central bank stimulus coupled with low interest rates. While these won’t go on forever, markets have become ultra-dependent on both, having helped propel them higher.

That said, markets being at or near all-time highs is much more common than we think. From 1950 to 2020, the broad U.S. equity market set 1,130 all-time highs, an average of ~16 times a year!

Far too often, investors try to “time” markets by waiting for a correction before they invest. The unfortunate fact is the correction often doesn’t happen, and they miss out on significant investment returns. Even if you had the misfortune of investing only at all-time highs, your returns over a one-, three- and five-year period are still pretty much in line. Keep in mind that the odds of investing at only all-time highs are nearly impossible.

Of course, there are outliers like 2001, 2002, and 2008 when buying at the top was painful, but the return numbers are still similar over time. In fact, when comparing annual returns over a one-, three-, and five-year period, the S&P 500 has actually performed better after new market highs versus after a 20% decline.

Market Corrections

The assumption is markets provide the best “opportunity” after a decline when, in reality, markets tend to increase further after hitting all-time highs. You might be once again asking yourself how this is possible. The answer is that market corrections, defined as a decline of 10% or more, rarely take place following all-time highs.

This data tells me that far too often, investors are waiting for a correction that rarely happens. The numbers are pretty eye-opening:

A market correction has taken place only 6.5% of the time one year out from each all-time high in the S&P 500.
The greater the time period, the lower the odds. In fact, the S&P 500 has never been down by greater than 10% at the end of any 10-year period following any all-time high since 1950!

Investing at times can be scary, especially as you near retirement, but the most important thing is not to overreact. Market corrections will come and go, but the key is to remember that they don’t happen often, and when they do, you need to focus on the long term.

Discuss your situation with a fee-only financial advisor.

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