Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
This past week, the Dow Jones Industrial Average again set multiple all-time highs during the week and managed to finish Friday above the 16,000 mark, climbing to a record 16,064. The S&P 500 also hit a few all-time highs last week, and broke above the 1,800 barrier while closing on Friday at 1,804.
But does it matter that the major indexes are hitting all-time highs? And not just once, but multiple times nearly every week?
Well, I don't think there's a clean-cut answer to that question. When we think about a stock hitting a new all-time high, what does that mean? To me, it doesn't mean a whole lot other than if I own it, it's never been worth more than on that day. But we often see stocks pushing higher and higher, setting new record highs, and while the media may mention it, they don't blow it out of proportion.
As the major indexes hit new highs, it's essentially the same thing, despite all the media hype. If you own an index fund, then great, that asset has never been worth more. But just because an index or stock is hitting new highs, that doesn't mean it's bound for a crash or correction.
Stock prices, and therefore index values, are based on company earnings, as well as on what those earnings are expected to be in the future. So if earnings are expected to increase from where they are today, then a stock price will increase, and if enough individual stocks rise, the indexes rise, too. If a stock or index sits at a new all-time high, it would simply imply that investors have never expected profits to be as high as they currently believe they will be.
Increasing profits are a normal thing. The world population is constantly growing, and innovations and new developments are regularly unfolding around us. Thus, business revenue and profits should, and normally do, also regularly move higher. And so stock prices will consistently increase over time despite the occasional crash, pullback, or recession when earnings slow down, thus causing stocks to fall.
Since this is the nature of stocks, regularly hitting new highs should be expected, not feared that it's a sign of an imminent market crash. Consider the number the Dow now sits at: 16,064. Has the market fallen backwards that many points without regaining those losses? Has the market crashed that many times? No, and no.
A new high for a stock or an index doesn't mean doom and gloom is right around the corner. But even if it did, based on what we know about the market and how it has recovered from the financial crisis or even the dot-com bubble on an un-inflation-adjusted basis, an investor would be better off riding out the downturn, knowing that sunnier days lie ahead.
A deeper Foolish perspective
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.
The article Does It Matter That the Markets Are at an All-Time High? originally appeared on Fool.com.Fool contributor Matt Thalman has no position in any stocks mentioned. Check back Monday through Friday as Matt explains what caused the big winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter: @mthalman5513. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.