On the morning of Friday, August 22, at 7:47 a.m., a text message pinged in from a client who’s faithfully (although at times reluctantly) followed our advice -- very successfully -- for the past quarter century. While not always a behavioral-advice adherent in word, he is always one in deed. He shared a New York Times article titled “How long Can This Uncanny Stock Market Last?” He then said “IMO, we should change our stocks-to-bonds ratio from 75%/25% to 60%/40%. What say you?”
Literally, less than one minute later, at 7:48 a.m., I received an email from a 10-year client sharing the same article with the comment, “worried about the market being top-heavy.”
A third, newer client with funds ready for investment pinged me with a text early on Labor Day morning sharing a Wall Street Journal Article titled “Stocks Are Now Pricier Than They Were In the Dot-Com Era.”
What these investors are doing, in each case, is asking for my blessing to time the market.
“After 50 Years in this business, I have never met anyone who can consistently time the market. In fact, I have never met anyone who has met anyone who can do it.”
John Bogle
The Response to These Concerns
The dominant message is that valuation, S&P 500 price levels (or anything else), is never a reliable timing tool. The economy cannot be consistently forecast, nor can the market be consistently timed. The only way to have fully captured the long-term 10%+ annualized return of the S & P 500 over the last 100 years was to be fully invested and to remain fully invested through every downturn and every new high -- hard stop!
I then offered two of many cases in point:
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A CNN article that a client sent me in September 2020 titled “US Stocks Haven’t Been This Overvalued Since the Dot-Com Bubble.”
The S & P 500 came into September 2020 at 3,392 and stands (almost exactly 5 years later) at 6,448. What followed this “too-high market” catastrophism was one of the best 5-year periods in the S&P 500’s history. The annualized compound rate of return (with dividends) was 15.25%. Dividends grew from $59 to almost $80.
Stock Values – up about 70%; Dividends – up about 37%; and Inflation – up about 25%.
Those who invested at those 2020 “overvalued” levels saw their income (cash dividends) outpace inflation by 50%, while their asset prices outpaced inflation almost 3-fold.
Those who chose the “safety” of bonds saw the purchasing power of every fixed dollar fall to 75 cents in just 5 years! At the end of the period, a 2020 dollar of dividends bought $1.37 worth of goods and services, while a dollar of bond income bought only 75 cents worth. This ignores the fact that every dollar of principle invested in stocks bought $1.70 of goods and services, while every dollar of bond principle only bought 75 cents.
Stock price declines are temporary, while purchasing power erosion is permanent. The 25% increase in the cost of living will not go back down.
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The declaration of "irrational exuberance" by Alan Greenspan in December 1996 when the price-to-earnings ("P/E") ratio was almost 20X. Three years later, in December 1999, the S&P had almost doubled – returning 23.5% annually — soaring from 735 to 1428. At about 6,500 today, those who invested at the height of Greenspan's proclaimed "irrational exuberance" earned an average annual compuond rate of return (with dividends) of almost exactaly – you guessed it – 10%!
No matter what the investor chooses to call market timing, attempting to cloak it as something more benign – market timing by any name is still market timing -- it has always, and will always, destroy compounding and wealth.
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”"
PETER LYNCH
Some Facts to Offset the Fiction
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New Highs Are Common: Of the 1,188 months since January 1926, the market was at an all-time high in 363 of them (31% of the time).
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On average, 12-month returns following an all-time high have been better than at other times: 10.4% ahead of inflation versus 8.8% when the market wasn’t at a high.
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Studying returns over the last half-century, JP Morgan found that 12-month returns were 9.6% following an investment at an all-time high versus 9.4% following an investment on days not representing a new high. For 24 months, investors on new high days earned 20.2% versus the 18.9% earned by investors on days not representing a new high.
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Of the roughly 1,300 all-time highs since 1950, market corrections (10% declines) occurred just 9% of the time. 3 years out, they occurred only 2% of the time and they never occurred 5 years out.
Beware of Denominator Deficient Reporting
Keep in mind that Fusion’s portfolios are positioned so that over two thirds of our equity exposure has nothing to do with the traditional S&P 500 index (a portfolio overweighted in the most expensive companies). When we remove the Magnificent 7 (Nvidia, Microsoft, Tesla, Amazon, Alphabet, Apple and Facebook) the other 493 companies trade at a P/E ratio very close to the long-term historical average. Our Large-Cap Value Index offers a more reasonably valued exposure to complement the traditional S & P 500 (growth) index.
Moreover, our exposures include International and small-cap companies, many trading at prices that are attractive relative to historical levels and the S&P 500.
Don’t be fooled by the media into thinking that the S&P 500 represents your entire exposure. It is not even the majority. The S&P is the numerator, the other two thirds of exposures are the denominator -- the media ignores this.
The real existential threat to wealth is not in the possibility of catching the next 20% temporary decline with new money; it is the risk of missing any of the next 100% permanent increase while trying to avoid the temporary decline.
Remember, market declines have been frequent and sometimes steep, BUT ALWAYS TEMPORARY.
Remember Why Stocks Go Up
Hint: the Fed has nothing to do with it!
It is because – and only because -- earnings go up, period. Stock prices nearly doubled from September 2020 to September 2025 because earnings more than doubled from $98.5 to $230. This is how it has always worked -- and likely how it always will. Earnings are the signal, politics, valuations, market corrections, recessions, rate hikes and everything else is the noise.
As an aside, Goldman Sachs reported that the recent second-quarter earnings report for the S & P 500 was one of the best ever. According to S&P Global, year-over-year earnings were up 10.6% and sales were up 5.1%, both set to post new quarterly records. Record earnings lead to record stock prices. The forward P/E ratio was 27 a year ago and now is 24. What happened? Earnings growth above expectations happened.
This leads to my final thought: is it not possible, or even likely, that as we enter the nascent stages of the 4th industrial revolution, we may see productivity enhancements so significant as to warrant a permanently higher valuation multiple? This is not me making a prediction but pointing out a possibility most do not consider.
My job is to help investors learn to operate rationally and consistently in a world where we have no facts about the future.
“Things that ave never happened before happen all the time.”
SCOTT SAGAN
Wishing everyone a happy fall, with happiness, peace, and love reaching all-time high levels!