Q3 2024 Commentary: All Time Highs: Strategy Prevails (Yet Again)

Pine Haven Investment Counsel, Inc. – Commentary – 3rd Quarter 2024

Casey Fitchett & Paige Johnson Roth, CFA®

Paige started Pine Haven in late 1999, which in hindsight has been called “likely the worst entry point in U.S. stock market history.”

Even if you had a pretty long time horizon, it has been a relatively rough ride for stock market investors since the turn of the century. Had you invested at the tail end of 1999 when the CAPE ratio¹ hit an all-time record of roughly 45x, you “would have been forced to sit through the ensuing crash from the dot-com bubble, the 2008 crash and this year’s Corona crash,” explains Ritholtz Wealth’s Ben Carlson. “That’s two times seeing the stock market get cut in half along with a 4-week period where it fell by a third. All in a little over two decades.”²

Notice how we use the term “hindsight”. We never know exactly where we find ourselves in the historical context until after it’s happened. We may look at trends, make educated guesses, and strategize, but of course there are no certainties.

Financial planning and investment management is all about strategy. At Pine Haven we are constantly thinking through various scenarios for clients, considering how we will handle changing market conditions. There are many unknowns, and the only constant is change. 

Just as we do in market downturns, we strategize during the rising market. And a rising market indeed it has been. As of August 31st, 2024, the S&P 500 price index had hit 38 all-time highs year-to-date. 

Investors often get shy about investing when the market keeps outdoing itself. “It’s overvalued”, “there’s no way it can keep going up”, and “it has to crash soon” are all lines that frequently accompany a rising tide. There are many seasoned “experts” who are ready to predict the next doomsday, because getting your click on their headline is generally good for their business.

However, historical data does suggest that investing at all-time highs is not necessarily a bad move. New highs have been known to cluster together. In other words, market strength begets more market strength. On the left, we show the S&P 500 price index and mark each all-time high that set a “market floor,” or an all-time high from which the market has never fallen more than 5%. Since 1950, there would have been many instances in which an investor sitting on the sidelines with markets near all-time highs would have never seen a better entry point. On the right, we show that returns from investing on any given day versus an all-time high are comparable and, in some cases, better when investing at market highs.

JP Morgan Guide to the Markets, 4th Quarter 2024

 

All that said, we understand the hesitation. What goes up must come down, right? Behavioral psychologists have noted that smaller losses are more impactful to our well-being than larger gains.

An investor’s time horizon obviously plays a critical role in the conversation. As one of our favorite commentators Blair DuQuesnay stated, “For long-term investors, the best day to buy the stock market is always ‘today.’” There is a multitude of data that backs up this claim. 

As we have already mentioned, we are strategizing and taking appropriate actions based on the environment in which we find ourselves. For clients who foresee cash needs (whether regular or one-time) in the next few years, we are replenishing cash reserves. This “bucket” of funds is what we can spend down gradually over time. With relatively high returns (historically) on cash in high-yield investments like money market funds and high-yield savings accounts, this tactic has its own upsides. 

As part of the rebalancing process, we review accounts for tax loss opportunities so that we can minimize taxes. We also look at charitable giving options as many of our clients are charitably inclined. Some tech stocks have seen unbelievable growth over the past 20 or so years, and many of our clients have a very low-cost basis on those investments. (Meaning that they bought the stock at a low price – the cost basis.) Selling the stock outright would incur a large capital gain, which might not be the best tax move. Donating the stock to a Donor Advised Fund allows for a deduction on taxes (up to a limit, and if able to itemize). From the Donor Advised Fund, the client can choose the organizations to which they would like to donate cash. 

Both selling and donating appreciated stocks have the side effect of rebalancing portfolio allocations. We want to stay diversified among different asset classes to reduce exposure to one particular sector or stock. These are just a few moves we are making to adjust portfolios as the market climbs.

All of this goes to say that timing any type of market is almost impossible. With a strategy in place for all types of situations, including a rising market, we can continue to make rational decisions that are beneficial for our clients in the long term.   

¹ The CAPE ratio, an acronym for cyclically adjusted price-to-earnings ratio, is generally applied to broad equity indexes to assess whether the market is undervalued or overvalued.

² What if You Only Invested at Market Peaks, A Wealth of Common Sense