Is the Market Headed for a
New All-Time High Soon?
By Joseph Slife
© Sound Mind Investing | March 2011
On March 9, 2009, the very day of what turned out to be the bottom of the steepest bear market in decades, a USA Today article noted that even if the market turned around right then (which it did!),  recovery would likely be a long time in coming. Assuming annual returns of 10% — i.e., roughly the long-term market average — "it would take eight years [for the large-company benchmark S&P 500] to climb back to its October 2007 peak," the paper reported.
But by mid-February 2011, the S&P 500 was up 95% from its March 2009 low, and bullish market observers speculated that the 2007 peak would soon be eclipsed by a new all-time high — a scenario hardly anyone anticipated in the dreary days of early '09.
Does the idea that a new high might be just around the corner seem a bit too rosy?
Believe it or not, in some market segments, it's already happened. Many stocks — primarily those in the small and mid-cap categories — have already surpassed their 2007 highs (see top two graphs at right). As of mid-February 2011, Wilshire's U.S. Small Cap and Mid-Cap indexes were 9-10% ahead of their '07 peaks (which occured in July 2007).
The overall market, however, is still shy of a new high. In mid-February, the Wilshire 5000 — the broadest measure of the market — remained 6% below its 2007 peak, due to the relative underperformance of the large-cap segment of the market (which has the greatest weighting in the index). Even though large caps have enjoyed a remarkable comeback, their upward trajectory hasn't quite matched the gains of their smaller- and medium-sized brethren.
As of mid-February, the Wilshire Large Cap Index was still more than 7% below its October 2007 high (see bottom graph at right). However, as noted in Size and Style Trends Provide Clues About Future Allocations, signs point to a potential change in leadership toward large companies and away from small companies. Large caps often (but not always) gain ascendancy as bull-market cycles mature and large companies exhibit strong earnings.
PAST PRECEDENT FOR STRONG RECOVERIES
The rapid recovery of the market from the 2007-09 bear market took many investors (and "experts") by surprise. But history shows that steep run-ups after deep troughs are not uncommon.
Even after the crash of 1929, the recovery — once the market finally hit bottom in 1932 — was more rapid than is typically understood. It's often said that it took the market more than two decades to recover from the crash and its aftermath. That conclusion, however, is based on simply measuring the index price performance of the 30-stock Dow Jones Industrial Average, rather than looking at total returns (i.e., including dividend reinvestment).
Research by Dr. Jeremy Siegel of the Wharton School at the University of Pennsylvania demonstrates that when total returns are considered, the actual length of time from the market's bottom in July 1932 back to its pre-crash high was only slightly more than four years. And that was after the worst market crash of modern times!
Strong and rapid bounces off market bottoms illustrate the difficulty of trying to time bear markets. Market timers have some successes, to be sure. But more often than not, they cash out well after a bear market has begun, thus forfeiting significant gains, only to get back in well after a new bull market is underway, thus missing out on the earliest — and usually the most explosive — returns.
Given that the recovery time after bear markets is often much shorter than feared, investors with longer-term time horizons are usually best served by staying the course, rather than trying to avoid bear markets via timing maneuvers. Sticking with a long-term strategy through bear markets — while certainly challenging — makes the mental/emotional side of investing much easier to handle than constantly trying to anticipate when the next downturn is coming. 
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Former SMI staffer Joseph Slife is now the senior producer and co-host of The World & Everything in It, a weekly radio program produced by WORLD magazine that can be heard here. He spent 15 years with Crown Financial Ministries, co-writing articles with Larry Burkett and serving as executive producer for broadcasting. |
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