| The Real Story Behind New Highs Will Surprise You | | By Dr. Steve Sjuggerud | | Monday, June 19, 2017 |
| "Markets around the world are hitting record highs, Steve… I'm worried they can't possibly go any higher."
I've been hearing this for years. And I get it.
Stocks have been going up for years. And we're near new highs around the globe right now…
U.S. stocks just hit a record high last week. U.K. stocks hit new highs within the last month… German stocks too. Japanese stocks haven't hit a record high, but they hit a 17-month high recently (which is still impressive).
It's not just these markets… All around the world, stocks are soaring.
As soon as any market hits a new high, investors get worried… They think it can't go higher.
But this is dead wrong, as I'll show you today. These new highs are great to see in the short term – though potentially problematic in the long term.
Let me explain…
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From an emotional perspective, I understand why people worry about new highs. But I also know what the math looks like…
The numbers tell a very different truth than you might expect.
I looked at the major world stock markets going back to the 1960s. (That's half a century of data for each country.)
Specifically, I wanted to find out what happened to stock markets after they hit new 12-month highs.
The table below shows what happened to the markets one year after they hit new 12-month highs, versus new 12-month lows.
| One-Year Returns After Extreme | | Country | After 12-Month High | After 12-Month Low | All Periods | | Japan | 19.3% | 2.7% | 7.6% | | U.K. | 6.4% | -1.8% | 5.2% | | Germany | 9.1% | 7.3% | 7.1% | | U.S. | 8.8% | 2.6% | 6.8% | | Source: MSCI |
The conclusion is simple: Stocks perform fantastically a year after hitting a new 12-month high. And they perform terribly in the year after a 12-month low.
In short, markets perform well after new highs, and poorly after new lows.
Last week, many markets hit new 12-month highs. This is actually a good sign looking one year ahead – not a bad one.
But how long will it last?
If you think markets have to fall back to Earth eventually, you're right.
The market does fall… at some point. It just doesn't happen as quickly as most people expect.
We've already looked at what happens one year after a market hits a new high or low. Now let's take a look at what happens in the long run…
Here's a table of the annualized returns of stocks five years after a new 12-month high or low.
| Five-Year Returns After Extreme | | Country | After 12-Month High | After 12-Month Low | All Periods | | Germany | 4.0% | 13.9% | 7.3% | | U.K. | 3.4% | 9.4% | 6.3% | | Japan | 8.2% | 6.7% | 6.6% | | U.S. | 6.3% | 8.1% | 7.2% | | Source: MSCI |
After stocks hit a 12-month high, they tend to underperform their typical returns for the next five years. (Japan seems to be an exception to the rule.)
The opposite is true as well… After stocks hit a 12-month low, they outperform their typical returns for the next five years.
So what can we take away from these two tables?
| 1. | In the short run (one year or less), markets really do keep going up after hitting new highs. | | | | | 2. | In the long run (around five years), markets do "fall back to Earth" after hitting new highs. |
Said another way:
| 1. The trend works in the short run. | | | | | 2. Mean reversion works in the long run. |
Most people don't want to hear this… They seem predisposed to only believe in one of those two things.
But it is true across nearly all asset classes.
So, here's what we can take away from this today: Based on history, stocks around the globe should continue higher in the next year. And in the next five years, they should underperform.
This also fits with my basic thesis: "Melt Up, then Melt Down."
I believe stocks can move much higher over the next 12 to 18 months… before finally falling lower as the extremes revert back to normal.
For now, that means we want to stay long stocks.
Good investing,
Steve |
Further Reading:
"Stocks and the economy don't work like most folks believe," Steve writes. Bull markets don't die of old age. And one economic indicator – with a shocking 50-year track record – is telling us we want to own stocks today. Learn more here: This Economic Indicator Says the 'Melt Up' Will Continue. Since the 2008 bust, fear has been driving investors. But the switch has flipped... And that means we're entering the final push higher in the bull market. "The largest gains will come as investors pile back into stocks," Steve says. Learn more here: The 'Melt Up' Is Here – Investor Optimism Hits a 17-Year High. |
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NEW HIGHS OF NOTE LAST WEEK 3M (MMM)... ACE Bandages, Post-it notes, Scotch tape Johnson & Johnson (JNJ)... Band-Aids, Tylenol, Listerine Abbott Laboratories (ABT)... Similac, Pedialyte, Ensure AbbVie (ABBV)... Humira, other prescription drugs Anthem (ANTM)... health insurance Aflac (AFL)... insurance Travelers (TRV)... insurance Progressive (PGR)... car insurance Wabtec (WAB)... train and freight technologies Boeing (BA)... world's largest maker of commercial jets Booz Allen Hamilton (BAH)... "offense" contractor Northrop Grumman (NOC)... "offense" contractor DuPont (DD)... chemicals Monsanto (MON)... seeds and pesticides Cemex (CX)... largest cement producer in North America NVR (NVR)... most capital-efficient homebuilder in America Zillow (Z)... online home listings Sherwin-Williams (SHW)... paint Stanley Black & Decker (SWK)... tools and storage Whirlpool (WHR)... refrigerators, washers, dryers Dish Network (DISH)... satellite TV New York Times Company (NYT)... global news coverage Choice Hotels (CHH)... Clarion, Comfort Inn, Quality Inn Citigroup (C)... banks Franklin Resources (BEN)... asset management Equifax (EFX)... credit reports H&R Block (HRB)... tax preparation Office Depot (ODP)... office supplies FedEx (FDX)... delivery giant
NEW LOWS OF NOTE LAST WEEK Kroger (KR)... grocery stores Groupon (GRPN)... online marketplace Fossil (FOSL)... watches Pandora Media (P)... "struggling to keep up" Snap (SNAP)... overhyped IPO |
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| How you'll know when to get out... The "Melt Up" is here in the U.S. Stocks are booming. And history tells us the next 12 to 18 months could see massive returns. A double in the entire U.S. market is possible. But that leaves one major question... Click here to get immediate access. |
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