Vol 3, Issue 12. Quarter 2 – 2026. 

There is a little fear monster that lives in the back of your skull. I suspect that right about now he is saying something like: “The stock market is at an all-time high and what goes up must come down – so this is a good time to get out.” Maybe that sounds reasonable to you, so let’s explore the idea a bit more.

First, we have to differentiate between a market level, and a market return. The level of the index for the stocks in the 500 largest US companies was first calculated using values from around 1941 as a base. That value was scaled so that the index level would be reported as “10”. This did not mean that you could buy 500 stocks for $10. It just meant that the market value of those stocks at that time was divided by itself and multiplied by 10 (which is clearly an arbitrary number) to create a starting level. This just puts the value on a scale that is easy to understand.

When the index level then moved to 10.01, that was the second all-time high. This wasn’t particularly significant news because the return was only {(10.01 – 10.00) / 10.00}/100 = 0.1%. When it moved from there to 10.02, followed by 10.03 you saw 4 all time highs. Again, this wasn’t big news because nothing really happened. Cumulative returns of 0.4% is an ok day, but nothing more. The point being that the index level is not the same as a market return, and having an all-time high today does not always mean that something important happened. Returns accumulate and produce new levels continuously. If the daily returns were always positive, you would literally have an all-time high every day. This doesn’t happen because some returns are negative. However, since they are positive on about 56% of all days, you end up with a LOT of all-time highs.

You should also note that the reported index level is based only on current prices. Dividends are not included. (Strange but true.) This is why total returns are not found simply based on a market level, and total returns are always higher than the simple index level would imply. This can be a. big deal because salesmen love to compare their total return to “market returns” based only on price changes. This makes their product look a lot better. Here is another interesting tidbit.  During the great depression, total returns averaged about 6% even though the market level did not return to its pre-1929 level for over a decade, because dividends as a percentage of price in those days were much higher than what we see today.

You should also note that price levels are typically not adjusted for inflation. If index levels simply change with inflation, then they will rise almost all the time, and this is also pretty close to meaningless. The level of the S&P 500 today is about 7455. Since that’s a lot more than 10, we know that we have seen literally hundreds of all-time highs over the years.

To be more precise, in 1957 the index officially was set at 500 stocks. Since that time, we have seen roughly, 1,200 all time highs.  Since 1970, this has happened about 970 of those times.  Part of the reason that all-time highs are more common since 1970 is that dividends (as a percentage of stock price) have been falling ever since the great depression, and market levels are based only on prices. When dividends fall, the only way to have the same total return is to have higher prices. The fact that a day in 2026 is more likely to have an all-time high then a day in 1956 does not necessarily mean that things are overpriced today. It simply means that the nature of the total return is different – more is embedded in the price, and less in the dividend. Let me state the overwhelmingly obvious here. After every one of those 1200 all-time highs, the market eventually went higher from there.

Ben Felix has recently commented on this in a nice way. He looks at index levels at the ends of each month. For a global basket of markets he found that average monthly returns following all-time highs are a bit higher than those averaged across all months, though not dramatically so. In other words, the returns that you see in the month following an all-time tend to be a bit better than average. This is known as “momentum” meaning that when the market is rising, it tends to continue for a while. In fact, the 1-year average return following an all-time high is consistently higher than the 1-year return found if you pick your starting point randomly. This is a rather long-winded way of saying that the data does NOT support the idea of bailing out this month because you saw an all-time high last month. 

Your CAPE Makes You Super

When prices rise for companies faster than profits, we see an increase in the ratio of Price (P) to Earnings (E). This is referred to as a rising PE ratio. This may coincide with all-time highs, but it is clearly not the same thing. When the media tells you that “stocks are expensive” this not simply because they are at all-time highs. It is typically because prices are high relative to earnings.

A slightly more sophisticated way to look at this is to use something like the CAPE which stands for Cyclically Adjusted Price Earning Ratio. This is essentially a PE ratio based on earnings over a 10-year period.  This approach is taken to smooth out normal fluctuations due to events that only have short-term effects. This was created by another one of those Nobel Prize winning economists. A professor named Robert Shiller created the metric in 1998. I met the Professor in 2015 and heard him explain that the US market was dangerously overpriced and he expected it to fall over the next few years because the CAPE level was unusually high. Over the following 4 years the total returns of the S&P 500 were 11.96%, 21.83%, -4.38%, and 31.49%. Let that sink in for a minute. A scholar, smarter than you ever dreamed of being, who has done some of the best research on this topic in history is about as good as timing the market as you are. This is yet another reason that I say – don’t even try it. It doesn’t work. Your best bet is simply to stay with the plan we have laid out here repeatedly. 

1. The time to invest is NOW. The amount to invest is the money that you do not need to live off of today.
2. The correct share of equities in your portfolio is as much as you can stomach.
3. The correct planning horizon (today) is the retirement of your grandchildren.
4. Diversification is the only free lunch that we know of, and we want it at the lowest possible cost.
5. Until I feel like I have a better model, that I can live with in any possible outcome, I am going to stick with this plan.  

Whatever you are selling that deviates from this plan is of no interest to me. But if you are adding something to this that you can show actually works, let’s talk about it. Until then, have a nice day.