There’s been some talk recently about how the stock market is due for a breather, a correction, or a retrenchment (take your pick of clichés). It seems that whenever we experience a nice run in the market, the bears come out and stake their claims for why it is now time to sell stocks. Aren’t these the same people who have been telling us to sell for the last five years? Hmm…
Yes, it’s true that the Dow Jones Industrial Average (DJIA) climbed from 12,500 to 14,000 in a relatively short period of time (Nov – Feb). That’s a nice 12% return, not counting dividends. It’s also true that the DJIA has risen 30% since September 2011. In fact, the DJIA has gained more than 110% since March 2009. Nothing goes up forever, right? Surely now is the time to sell and bank a profit, right?
Before pulling the trigger, perhaps we should take a moment and examine a little stock market history. The Dow Jones Industrial Average was created by Wall Street Journal editor, Charles Dow, on May 26, 1896. The well-known benchmark is named after Dow and one of his business associates, a statistician named Edward Jones. Then, as now, it consists of 30 large publicly-traded companies based in the United States. Back in 1896, the beginning value of the index was 40.94, but within months fell 30% to 28.48. Not a great start, but the market quickly recovered and on September 3, 1929, the Dow closed at 381.17 (up 1,200%). Over those 30+ years, there were many significant drops in the index, but each time it recovered and subsequently posted new highs.
During the Great Depression, the Dow plunged all the way back to its original starting value. We may have experienced a lost decade (2000 – 2010), but that was a lost generation! During the 1930s and 1940s, there were periods of great appreciation (and great depreciation). It wouldn’t be until 1954 that the Dow finally climbed above the previous all-time closing high of 381.17.
From 1949 – 1966, the U.S. economy and the stock market posted impressive growth and the Dow closed just five points shy of 1,000 on February 9, 1966. As was the case during previous bull market runs, many investors sold large stock positions along the way, thinking that stocks were due for a breather.
From 1967 – 1982, investors had to deal with a stagnant economy and an inflationary monetary environment. It was not pretty for stocks. The Dow fell nearly 45% from its all-time high. In late summer 1979, Businessweek published a cover story headlined, “The Death of Equities” which warned that things might get even worse. Of course, with the benefit of hindsight, we know that 1979 (and the years that followed) were a great time to be buying stock.
From 1982 – 2000, the stock market experienced tremendous growth. The Dow climbed from 777 in 1982 to 11,723 on January 14, 2000, a 1,500%+ increase. In 1996, Alan Greenspan suggested that the U.S. stock market was experiencing irrational exuberance and that a prolonged contraction (similar to what Japan was going through at the time) was possible. Had one sold stocks in December 1996, they would have missed a 78% rise in the Dow from the beginning of 1997 to the end of 1999. Who could have stayed on the sidelines for three whole years (while everyone else was minting money in technology and telecom stocks)? And then be brave enough to get back into the market in the midst of extreme angst immediately post 9/11?
Depending on how you look at it, one could argue that we are still in a bear market going all the way back to January 2000. On an inflation-adjusted basis, the Dow is still trading below both the 2000 and 2008 peaks. Why should the stock market have to fall from here?
The answer, of course, is that it doesn’t have to fall just because we have experienced some nice gains. It might. There’s always that possibility. That is why long-term stock market investors are rewarded (more often than not) with high returns. Stocks are risky. Risk and return are related. Know that ahead of time so that you can have the intestinal fortitude to stick to your chosen investment strategy. And don’t let anyone tell you that stocks can’t go higher.