On Friday, November 16, 2019, the Dow closed above 28,000 for the first time in history. It marked the 11th record close of 2019 and its second 1,000 point milestone for the year. Average investors don’t know what to make of such news stories. Some think such a Bull Market bodes well for stock investments. Others think the market makes new highs before it dips. Neither position is warranted.
The markets are inherently volatile but they are also inherently profitable.
We can measure when the Dow sets a new high, but there is no such thing as a new low. The markets have continued to trend upward for hundreds of years. When people question, “Well, the market can’t just go up forever, can it?,” the correct answer is, “That is what it has done so far, with bear markets and crashes along the way up.”
When the Dow sets a new high, it may fall below that high, cross it again on the way back up, and cross it again on the way back down. What is assured, or at least has always happened, is that at some point the index will cross it on the way back up never to go below that value again.
For example, the Dow first reached 2,000 on January 8, 1987. It stayed above 2,000 for 284 days until October 19, 1987 when it dropped below 2,000. It bounced above and below 2,000 a total of 25 times for 1.6 years until finally crossing 2,000 for the last time never to drop below that value again. Crossing 2,000 was not a particularly auspicious omen as the following 12 months had a return of -4.54%.
When the Dow reached 3,000 on April 17, 1991, it crossed that value 23 times in just 250 days producing a subsequent 12-month return of 12.05%.
Setting a new high does not seem to be either a particularly dangerous nor a particularly safe time to be fully invested in the markets.
The worst crossing was 14,000 on July 19, 2007. The subsequent 12-month return was -17.88% with the 2008 financial crisis still to follow. It took 5.6 years for the Dow to finally cross 14,000 again never to go below.
The best crossing was 4,000 on February 23, 1995. The Dow crossed that value just 5 times over 15 days on its subsequent 40.65% rise over the next 12 months.
The smallest number of crosses was on November 21, 1995 when the Dow crossed 5,000. That day it not only hit a new high but it never went below that value again.
The largest number of crosses started on May 3, 1999 when the Dow crossed 11,000. Between that day and 12.4 years later on October 6, 2011 the Dow crossed 11,000 a total of 87 times.
Setting a new high has nothing to do with the subsequent return of an index.
Since January 29, 1985 and now when the Dow reached 28,000, its average annual return has been 9.24%. Meanwhile the average subsequent 12-month return for the Dow after reaching a 1,000 point high has been 10.62%.
The likelihood of a positive subsequent 12-months is 72%, exactly the same as the percentage of calendar returns that are positive in the markets. This means that Dow crossing only signifies that the markets will behave as they always do: volatile and trending upward.
On average after crossing a new high, the Dow crosses that new high a total of 23 times over 4.1 years. This is normal.
This normal volatility is one of the reasons we recommend having at least 5 to 7 years of safe spending in bonds. The markets are volatile over short periods of time.
If this Dow 28,000 were an average crossing, we would expect to see the Dow trading up 10.62% at 30,973 a year from now on November 16, 2020. We would also expect to see the Down subsequently drop below and rise above 28,000 another 23 times, not staying above that number until December 15, 2023.
If that level of volatility isn’t your expectation, you are not yet familiar with normal volatility in the markets.
Here is a complete guide to the Dow crossing 1,000 point milestones:
A 20% Bear market at the current level of the Dow would bring the Dow down to 22,400. Bear markets are part of normal expected volatile stock market returns. Thus, I have left out the duration of crosses for any value which is less than 20% below the Dow’s current value.