If you haven’t noticed, the S&P 500 and many other market indexes have been on a historic run from 2009 until present day. Yet, as an investor, you must ask yourself, how much further the market has to run before it experiences a significant correction?
In a previous blog, I wrote about the need for investors to understand the concept of regression to the mean. Now I’m asking myself whether what we’re experiencing in the market, should be looked at as an extreme. If we are at an extreme of this market run, then it would be logical to conclude that market forces will likely drive prices to a more ‘reasonable’ level.
A picture is worth a thousand words, so I’m including a graph of the S&P 500 from the 50’s until present day. You will see an interesting pattern from the hot market run-ups in the early 2000’s and latter part of last decade. Do we follow the pattern shown or have we entered an new paradigm? That’s a question I’m not ready to speculate about.
One area that I will speculate about is that when we come up against ever greater and greater returns, it becomes more and more difficult for investors to find areas where very attractive investments exist. How hot can the market get and how long can it stay hot before investors takes a breather?