Have Stocks Peaked At Last? Hardly

Posted on August 19, 2016 at 10:09 AM PST by

If you follow the financial news on websites or cable TV, it’s easy to run into the same argument over and over.

Stocks peaked. Get out now while you can. What’s fascinating about these market “top” calls is how consistent they are.

Stocks hit all-time highs on one day. The next day it happens again. Then again.

stocks peaked

The problem is, investors confuse stock market indexes with a mountain top. Everyone knows mountains have peaks. From there, all directions are down.

But stock market charts are not mountains. They are two-dimensional representations of numbers.

Those numbers over long periods move up. It can seem like a trick, a trap to avoid. Surely there is a point where stocks can go no higher?

Yes, there is. There can be market bubbles in stocks which go extraordinarily high — sometimes straight up! — then fall extraordinarily low soon after.

These are not peaks, however. They are bubbles, plain and simple. They pop and stocks quickly return to more reasonable levels.

The underlying forces of the economy didn’t change before the bubble started, and they remain the same after a bubble pops. That’s why over longer periods of time — through wars, bouts of inflation, scandals and political crises — stocks go higher and higher.

Jeremy Siegel, a professor of finance at the Wharton School of Business and author of Stocks for the Long Run, puts it this way: Stocks beat bonds, beat gold, beat cash.

In fact, he says, stocks grow in value at about twice the rate of long-term economic growth, thanks to reinvested dividends. That’s why stocks beat inflation.

No substitute for stocks

And there’s no real substitute for stocks over a period of 10 years or more. You won’t find the same growth elsewhere, nor should you try to find it elsewhere.

It’s when people decide that the stock market has peaked that they tend to sell and sell hard. Joining them in the panic is a clear way to lose money.

Yet buying as they sell is locking down future gains at reasonable prices.

A solid, risk-adjusted portfolio of index funds will give you those gains over time. Rebalancing helps you pick up the bargain stocks that others cast off.

Meantime, you can ignore the TV pundits screaming that stocks peaked and you should sell, that every direction is down.

They’ve been wrong for decades upon decades, while stock investors have prevailed.