Markets Don’t Crash from All-Time Highs

 “Markets don’t crash from all-time highs.”

This old saying is making the rounds again. Why?

The Dow just closed at an all-time high for the 8th consecutive trading day and 34th time in 2017.

Dow Jones Industrial Averaga graph1

That’s a lot of all-time highs, and it comes after the 122 all-time highs in 2013-2016. We haven’t seen this many all-time high in consecutive years since the 1990’s.

All time highs of Dow Jones Industrial Average chart2

Naturally, investors are feeling pretty good, with one prominent strategist proclaiming today that the bull market could “continue forever.”

The bull market could continue forever

Interesting, but what does the saying “markets don’t crash from all-time highs” actually mean? And why do people say it?

It’s supposed to imply that buying all-time highs is safer than buying on any other random day. That because tops are said to take time to build, so there will be plenty of time to “stop dancing” before the music stops. It also implies that the largest declines do not immediately follow all-time highs, because volatility tends to be lower on all-time high days than your average day. As volatility exhibits “clustering,” Benoit Mandelbrot observed that “large changes tend to be followed by large changes, and small changes tend to be followed by small changes.”

Are these assumptions supported by the data? Let’s find out…

First, we need to reaffirm that there is nothing inherently bearish about all-time highs. I’ve covered this many times in the past few years with the simple conclusion that “all-time highs tend to be followed by more all-time highs.”

That’s because, on average, forward returns are positive after all-time highs, meaning more all-time highs. The positive forward returns also happen to be a feature of any other random day, though marginally lower than all-time high days.

Average forward price returns of Dow Jones Industrial Average chart4

Note: all data herein are price returns only, not including dividends.

As for the percentage of positive returns, here too we find a likelihood of further gains, with a small edge to all-time highs in periods less than a year.

Avg forward positive average chart5

What about the risk of loss? An all-time high does not seem to preclude large future losses.

Worst forward returns of Dow Jones Industrial Average chart6

However, the largest losses following all-time highs pale in comparison to other days. Why is that? Because record highs tend to occur in periods of lower volatility. Since 1900, the Dow’s volatility on all-time high days was less than half of its average on all days.

Average Annualized Volatility graph7

It often takes some time for the market to transition from a period of lower volatility (where declines are small) to a period of higher volatility (where declines are large). Hence the saying: “markets don’t crash from all-time highs.”

But “some time” does not necessarily mean a long time. In fact, the worst crashes in the last 100 years, 1929 and 1987, both occurred within two months of an all-time high…

  • On September 3rd, 1929, the Dow hit its 33rd all-time high of the year. Over the next month, it would fall 10% and over the next 3 months it would fall 36%. On October 28 and 29, it fell 12.8% and 11.7% in back-to-back sessions. By the time it bottomed in July 1932, it had suffered an 89% decline. There wouldn’t be another all-time high until 1954.

Dow Jones Industrial Average graph8

  • On August 25, 1987, the Dow hit its 56th all-time high of the year. Over the next 3 months, it would fall 29%, with the largest one-day decline in the last 100 years occurring on October 19 (-22.6%). The Dow wouldn’t hit a new high again until August 1989.

Down Jones Industrial Avg graph9

Crashes get all of the attention, but most bear markets are not like 1929 or 1987.

  • On February 9, 1966, the Dow hit an all-time high. It declined 25% before bottoming that October. A new high was not reached again until 1972.

Dow Jones Industrial Average graph10

  • On January 11, 1973, the Dow hit an all-time high. Over the next 18 months, it would lose 45% of its value. The Dow did not register another new high until 1982.

Dow Jones Industrial Average graph11

  • On July 17, 1990, the Dow hit an all-time high, the same month the U.S. entered a recession. 3 months later, it stood down 21% from those highs.

Dow Jones Industrial Average graph12

On July 17, 1998, the Dow hit an all-time high. By, the end of August, it had fallen 20%.

Dow Jones Industrial Average graph13

  • On January 14, 2000, the Dow hit an all-time high. By October 2002, it had lost 38% of its value. The Dow did not register another new high until 2006.

Dow Jones Industrial Average graph14

  • On October 9, 2007, the Dow hit an all-time high. By March 2009, it had dropped 54%. A new all-time high was not hit again until 2013.

Dow Jones Industrial Average graph15

The point of this exercise is not to say that the all-time high on August 4, 2017 will join the lexicon of notable peaks, but to understand that it could. There’s nothing magical about an all-time high that prevents large declines from occurring. Indeed, by definition, every bear market in history was preceded by an all-time high.

While volatility clustering makes an imminent “crash” less likely, the environment can change quite rapidly, as we saw in 1929 and 1987. As Nassim Taleb has said, “don’t confuse a lack of volatility with stability, ever.” An all-time high is not without risk.

But the fact remains: stocks tend to go up on average, and as such new all-time highs tend to be followed by more all-time highs. That is as true today as it was on September 3, 1929, January 11, 1973, January 14, 2000, and October 9, 2007. Unfortunately, no one rang a bell at these all-time high tops, alerting you that there would be no new highs for years to come.

Unless this bull market goes on forever, the same will be true today. There will be another large correction. And it will start with an all-time high that looks and feels innocuous. No bell will be rung.


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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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