Let’s just take a moment to reflect on the markets. Roughly speaking, the market has had 3 distinct peaks in the past 15 years.
First, in mid 2000, market investors were willing to pay high premiums for being invested in the market prior to the dot-com technology crash. The S&P 500 – the classic broad based benchmark for US investors – hit 1520 before a slow decline throughout 2001-2003 era.
Second, the slow recovery of classic business principles (i.e. profits are at least as important as first mover advantages) let the S&P return to the mid-1500 range by late 2007, but this time, the valuations were not overstretched as investors were paying for real earnings. Of course, we learned through 2008 that this apparently conservative positioning overlooked a systemic weakness within the mortgage markets and, by extension, the financial sector. Over the past few years, we’ve been digging our way out of that.
We just hit the third peak last week. The markets hit new milestones: 17,000 in the widely followed Dow Jones Industrial average and the S&P 500 is nearly at 2000 (1977.76 at the time of this writing). Of course, we have no way of knowing if the last week’s market high is a peak preceding another fall or just a waypoint along a continued advance. We will only know which is true with the benefit of hindsight.
In times of market stress, we have written monthly newsletters (e.g. “The Balancing Act” in September 2011 or “Storm Clouds” in June 2012) encouraging our readers to take the long term view on inevitable downturns. Since we are now standing in the more enviable position as beneficiaries of a market rally, let us remind ourselves to accept short term shocks and victories, and keep the focus on the long term positioning of our portfolios.