History Says Stocks Can Keep Going Up
Chris Ciovacco | Jan 16, 2018 01:01PM ET
A common bearish argument making the rounds over the past year goes something like this:
Stocks have been rising for over eight years; they can't keep going up.
As shown in the NYSE Composite chart below, stocks rallied for eight years off a major low in 1974, broke out to a new all-time high, and then subsequently rallied for an additional 18 years. In present day, stocks rallied off the 2009 major low and broke out in 2017 making a new all-time high.
Given humans tend to extrapolate the recent past into the future, many expect the next major move for the markets in 2018 is a 50%-plus bear market similar to the 2000-2002 and 2007-2009 periods. That is not what happened after the similar historical setup in the early 1980s. Instead of following the 1964-1980 script, stocks tacked on an additional gain of over 700% (see chart below).
If we are to take the "all the charts are meaningless because of valuations" argument seriously, we must convince ourselves that valuations were a useful timing tool between 1964 and the stock market peak in 2000.
h3 A Fair And Fact-Based Assessment/h3In order to make a prudent assessment of the real-world utility of valuations, we must review the information that was available as stocks marched higher between the end of 1982 and 2000. For example, when stocks broke out to a new all-time high in 1982, the median Shiller PE or CAPE ratio looking backwards (1881-1982) was 14.83.
Get The News You Want
This week's video takes a detailed look at two periods, 1992-2000 and 1956-2000, to evaluate the effectiveness of attempting to use the Shiller PE or CAPE ratio as a market timing tool. In the video, Shiller PEs are reviewed on stock charts, allowing you to draw your own fact-based conclusions.
h3 Long-Term Means Long-Term/h3Just as there was normal and sometimes gut-wrenching volatility between 1983 and 2000, even if better than expected outcomes occur over the next 3-20 years, volatility will be part of the equation.
/h2
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.