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Price, Value, And Persistence

Robert Capanna
Published on August 5, 2016

Robert Capanna

It has been over seven years since the S&P 500 bottomed out of the Great Recession trading at 677 on March 9, 2009, a price last seen in May of 1996.

Since then it’s been pretty much nothing but gains. The index bested its previous pre-recession high of 1,565 from October 9, 2007 by the end of March 2013, and the S&P 500 reached a new high of 2,175 on July 22 of this year – a cumulative price gain of about 220% from the low.

The reaction of investors to every new market high has been a predictable one – it must be time for a market correction. It’s a kind of fear of heights – we have soared so high that we must fall back to earth. After all, we all know about reversion to the mean, what goes up must come down, etc.

The error of expecting price to be an indicator of whether or not the market is overvalued and due for a correction is obvious. After all, the S&P has had 115 new daily market highs since the end of March 2013. Certainly, the market has lost ground on many days too, but the overall trend has been ever upward and there is no particular evidence to suggest that the 116th daily high is going to be the one that finally triggers a correction.

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