Here’s some disturbing news for those of you who think you’re basing your investment strategy on history: The U.S. stock market must fall 43% in order to be in line with the longest-possible trend in its history.
Now is definitely not one of those times. In fact, as the chart shows, there have been only two other occasions when the U.S. stock market was as far above trend as it is now: the late 1960s/early 1970s and at the top of the internet bubble. We all know what happened after those two periods. The internet bubble burst, taking stocks with it, and the stock market from the bear-market of 1973-74 went nowhere on a dividend-adjusted and inflation-adjusted basis through 1985.
You could draw your trendline to extend back to the early 1920s. Relative to it, the current stock market is 9% below trend. Or you could decide to draw the trendline back to 1965. If you did that, you’d discover that the stock market would have to fall 37% in order to return to the trend. What about the Nasdaq Composite COMP, +0.32% ? That index was created in 1971, so less data are available for it. But it’s more than 30% higher than a trendline drawn back to then.