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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...
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
After 12-Month High
After 12-Month Low
All Periods
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
After 12-Month High
After 12-Month Low
All Periods
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,

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.

Market Notes

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
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
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

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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