No, Market Highs Are Not a Bad Sign

The day’s trades had barely closed, when the Johnny one-notes began their usual litany of complaints. The market is long in the tooth, we are told; the bull cycle is Fed-driven, it's temporary, its “toppy.”
Photographer: Angel Navarrete/Bloomberg

With the reduction of tensions on the Black Sea, global markets rallied yesterday to multi-year highs. In the U.S., the S&P 500 closed at an all time high of 1873.91. Other markets set new multi-year or all-time highs as well. The world is breaking out.

The day's trades had barely closed, when the Johnny one-notes began their usual litany of complaints. The market is long in the tooth, we are told; the bull cycle is Fed-driven, it's temporary, its "toppy."

Then there is my favorite complaint: All time highs are dangerous, a sign of a market that has gone too far. (Subtext: Get out now!)

Unless you can be bothered to look at the actual numbers: If you were willing to actually consider the quantitative data about highs, you might reach a somewhat different conclusion. In point of fact, one of the most bullish things that can happen to any market is for it to reach new multi-year highs.

This finding should be intuitive, but it appears to be anything but. Do a quick scan of commentary, especially since the 2013 breakout above the 2007 highs, and you find a running theme that new highs somehow are a negative. The consensus, at least among a certain subgroup of market participants, is that new highs equal danger, making a market collapse not only inevitable, but practically imminent. The higher the market has rallied, the more specific and ardent the calls for a crash have become.

To the bewilderment of the chattering class, markets have ignored these demands for, quite literally, years.

Consider the actual historical data. New highs occur very regularly during bull markets. This makes the crash insistency much less compelling. Indeed, we tend to see many more new highs during the secular bull markets than we do during the bear cycles.

Dow Jones Industrials New Highs During Market Cycles


The data is compelling. The secular bear market that began with the implosion of tech and dot-com stocks in March 2000 saw a mere 74 new highs during the ensuing 13 years. But in the year 2013 alone, when both the S&P 500 and the Dow eclipsed their pre-financial crisis highs, there were new record highs constantly -- 50 of them for the psychologically important DJIA. This equates to almost 70 percent as many highs in a 12-month span as we saw in the entire 156-month period that preceded it. That's also higher than the average number of new highs from the 1983-1999 bull market.

And it's not just the Dow Jones -- the S&P 500 has seen a similar run of new highs. From 2000 to 2012, the S&P 500 had just 8 new highs. In 2013, by contrast, it printed 54 of them.

In other words, both last year and this year look much more like a secular bull market than the prior secular bear. We usually cannot tell until after the fact, but it is beginning to look like a new long-term bull market is underway.

The sheer number of record closes can be jarring for investors -- until they step back and realize that new highs are endemic to bull markets and tend to be plentiful during expansionary periods, as the table above shows.

There are still many things that can go wrong to derail these markets. Stocks are at best fairly valued, and by many measures expensive. The economy could easily stumble on any number of factors. Rising rates will certainly crimp housing and auto sales, two sectors that have been robust the past few years. Any number of things could operate as a setback for equities.

New highs, however, and not one of them ...

(Barry Ritholtz writes about finance, the economy and the business world for Bloomberg View. Follow him on Twitter at @Ritholtz.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.