After a new S&P 500 peak, history tell us that 56% of the time the index goes on to make another new all-time high the very next trading day, and 42% of the time declines 1.6% before setting a new all-time high, less than a month later, on average. For an astonishing 98% of market peaks, the market goes on to another new high within a month.
S&P 500 PRICE INDEX POST RECORD HIGH CLOSES (January 3, 1928 – May 31, 2017)
Source: S&P Dow Jones Indices LLC
Of course, corrections do occur, but only about 1% of the time, and the market typically recovers within a matter of months. Since 1928, the S&P 500 experienced a correction only 11 times, with the most recent occurrence ending on July 2, 2016. Interestingly, the 1990’s contained 5 corrections. However, there were no corrections in the 2000’s, 1970’s, 1940’s or 1930’s.
Although rare, bear markets are far-reaching, and recovery periods are measured in years. At 10 occurrences since 1928, bear markets have been the least likely scenario after a new all-time high. Bear markets are also accompanied by serious underlying issues related to economic recession, inflation, asset valuation, government policy and other fundamental or structural problems. The most recent was the financial crisis of 2007, which was the second-worst bear market, with a 57% drawdown and took five and a half years to set a new high. While these events are emotionally wrenching, even the bear markets can be weathered and goals can be reached in a long-term investment portfolio by staying invested.
Around market peaks, people often wonder, “Is now the right time to invest, or should I wait?” It’s clear from history that waiting for a substantial decline in the market before investing poses a much larger risk of missing out on positive returns than can be offset by trying to avoid low probability serious negative returns. For long-term investors, the sooner and the longer the investment, the better the outcome.
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