Stocks Hit All Time Highs – Time to Worry?

With Dow Jones and S&P 500 hitting new all time highs seemingly every day this year, one cannot help wondering – is the rally close to its end and is it time to lighten on stock holdings?  Indeed, S&P 500 is up nearly 16% this year alone and up astonishing 160% from the bear market bottom reached in March 2009.  Moreover, Wall Street saying “Sell in May and Go Away” was right on the money for the last 3 years, so should we get worried this May?

Short term, I am concerned.  I think that a correction is overdue and will in fact be quite healthy for the market.  Longer term, I am more optimistic. Despite the advances over the last 4 years, S&P 500 is up by only 8% from previous bull market top in 2000, hardly an inspiring gain over 13 years.  Although it may be difficult to believe given the market roller-coaster for more than a decade, achieving new highs is actually a normal state of the market.  As it should be – as population, economy and GDP expand, so does enterprise, and consequently, market valuation.  This is what happened during the previous bull market of 1982-2000 and the one before it, 1950-1970.

It is quite likely that 3 major inflection points in market trends are taking place right now or possibly have already occurred.  First, the secular bear market that started in 2000 most likely ended in 2009, and the current four year old market advance is more than just a bear market rally.  Second, with interest rates near zero, the 30 year old bond market rally is over or at least nearing its end.  And finally, as a consequence of the above, the so-called Great Rotation out of bonds into stocks is starting (or has already started).  Indeed, why own a blue chip bond which yield is lower than the dividend yield and does not offer a potential for stock appreciation?

Despite recent gains, overall market valuation remains quite reasonable, near average of its historical range.  However, given extremely accommodating fiscal policies, equities have little real competition.  And as in any market, one can always find great companies unfairly discounted by current investor sentiment.  Many investors are still very cautious and an there is no general euphoria over the recent highs.  Thus, equity markets remain an attractive place to be.