Welcome back from the long holiday weekend. Before we left for our nation’s birthday celebration, markets had a little party of their own: The Dow had broken 17,000, the Standard & Poor’s 500 Index had touched a record high and was spitting distance from crossing 2,000. Even the small-cap indexes such as the Russell 2000 and the S&P 600 have notched new highs. And the Nasdaq, up 255 percent since the March 2009 low, is less than 15 percent away from the record set in the dot-com-era market of 2000.
Despite evidence that new highs are bullish — we don’t get them during bear markets — the commentariat and much of the news media sees this as a matter of great concern. Consider a perusal of this morning headlines:
Some of these articles make for interesting reading, but they don’t make for especially good investing advice. Why? I can think of three reasons:
1) Corrections are a normal part of any market cycle: Every market has regular pullbacks and consolidations. Since the market made its lows in March 2009, it has had nine corrections from more than 6% to almost 22%, beginning with a 9.1% decline five years to the day from tomorrow.
If these are a normal part of any market cycle, why do we fear them? Like the change of seasons, we should accept them as simply inevitable. Instead of fear, consider making preparations so that when the inevitable comes, you have a plan. The alternative is an emotional reaction — and that’s never good for portfolios.