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I don't love historical business comparisons as they relate to markets. They're used to sell books about market crashes and euphorias, but there are too many significant variables that change over time for the analogies to be worth much predictively.
A lot of people are asking One Day In July advisors if we are worried given the high price-to-earnings ratio of the S&P 500, now exceeding the top of the dot-com bubble. This is only one asset class in which we invest, but let's ignore that detail. Yes, it is expensive, but investors have concluded that business is robust and growing. And there were trillions of dollars printed that have to go somewhere. Eventually some of them reach the bond and stock markets.
Let's rewind to 1997. The movie Titanic was skyrocketing, unlike its eponymous boat which was not so fortunate, and Michael Jordan & Scottie Pippen still liked each other, at least enough to cooperate on court. More quietly, the market's price-to-earnings ratio was rising:
Jan 1, 1995: 14.89
Jan 1, 1996: 18.08
Jan 1, 1997: 19.53
People were getting worried in 1997 about this. The tech bubble was emerging and the sock puppet of pets.com hadn't even made an entrance yet. There was talk that it was time to sell and harbor the ship from the coming storm.
The storm did happen, and no amount of chatter from Sock Puppet could calm it. The S&P 500 declined 47.4% from the top of dot-com to the post-9/11 bottom in 2003, and that included dividends (the price drop was 49.1%).
But if you had reacted in 1997... you probably would not have been happy. For three more years the S&P 500 continued its inexorable rise, with a price-to-earnings ratio that peaked at 29.04. At the top, surgeons were day-trading between procedures, pontificators were declaring the end of work, and Wall St. analysts decided U.S. dollars didn't matter, that eyeballs on web pages were the new currency (I'm not going to draw any analogies to crypto here).
Now here's the problem. As the market ripped up, you were on the sidelines. From 1997 to the top three years later, your calm neighbor who was not worrying about the market but was busy composting her coffee into her petunia flower beds doubled her money, while you and your accountant were figuring out how to pay the tax bill on your trade. While the cash had the benefit of being less volatile, this drip drip of underperformance has the tendency to break someone at just the wrong time, so you may have re-entered the market a few years later... at the top.1
By the year 2000, Neighbor Petunia had room to take some losses versus you. So even if the market comes down a lot, which it did, it went up a lot before that. Here's how it worked out over a decade, starting at the beginning of 1997 with $100,000. The dark green line is the S&P 500, the blue area is a diversified blend of 80% S&P 500, 20% small-cap (Russell 2000), and the gray area is how cash performed:
You can see that it's a fool's errand. There is no way to know when to get out, and there is no way to know when to get in. A small group can make a lot of money selling books that scare people or get them excited. For everyone else, don't try to time the peaks and valleys.
~ Dan Cunningham
Notes:
1. Technically: "At the top... and without the tax money you paid."
2. S&P decline source: Morningstar Sources for P/E multiples. Multpl.com and Shiller
3. Graph data source: Yahoo Finance and ODIJ Research. Daily effective funds rate is used for cash. Daily rebalancing assumed in the 80%/20% portfolio. Total return assumed (dividends included). One Day In July LLC does not guarantee actual returns or losses. Past performance does not guarantee future returns. Returns vary based on start and end dates selected. Returns presented do not take into consideration any taxes, investment fees, or inflation.
Financial creativity is on full display this year: alternatives, private credit, private REITs, crypto, stablecoins. But it is hard to understand these products, and part of the reason they are concerning is that many of them are new and have not been tested under duress.
At some point, markets will go down. They'll go down far and long, and it will feel depressing. Companies will stop naming themselves "Bullish Corporation" and going public.1 But a market-capitalization-weighted index fund reflects the economy, and we have a lot of confidence that over time, in the United States, 340 million of us working hard will figure things out.
But in a more esoteric investment that you don't understand? Or perhaps a single stock that you didn't analyze correctly? Confidence dissipates rapidly. In periods of economic decline or uncertainty, if you don't truly understand what is driving the mechanics of the investment, you'll start to question your own decision-making as the investor. Instead of confidence, panic will creep in. Instead of thinking "This is kind of terrible but we'll get through it" you start to think "I have to change something or I'm going into the abyss."
My wife is in medicine and there is an active debate in our household about whether there are more quack medical or financial ideas floating around out there. She made the point the other day that "research exists so that people don't think their own experiences are scientific reality." I thought this was great and secretly wished I had come up with it! You can get into a real epistemological hole on this one when you start questioning your reality, but keep in mind that your experience and insights are just a sampling point in a set, just a dot on a curve. The very democratic index counts them all.
ETFs are proliferating. There are lots and lots of them, and it's important to know that an ETF *is not* necessarily an index fund. Initially most ETFs tracked indexes.
The financial industry realized that the public liked the term ETF, in part because the goodwill from indexing bled into ETFs, and the vehicle itself is good in many ways, like tax efficiency. So of course a lot of meetings got held and I am sure a lot of consultants got hired to mess up a good thing. "Let's package one stock, like Nvidia, in a triple-leveraged ETF" says Connor at the end of the table, sipping a colorful Alani energy drink in part to show his sensitive side while pushing this daring bro trade. And Maria is like "It's been 17 years since the global financial crisis, and I got through that ok when I was in 8th grade, and so I think these derivatives aren't so bad after all, so let's pack them into an ETF and I promise I'll come up with a nice-sounding name for it. I might use the word 'Freedom' in it, just letting you all know ahead of time.'"
4,300 ETFs later, Connor and Maria have their promotions, and everyone else is confused and buying things that are complicated and hard to understand.
Remember: you want to invest in indexes, and you might do so via a low-fee ETF or via a mutual fund.~ Dan Cunningham
Notes
1. Though I do tip my hat to them on this one. Also Bearish Corporation as a name would have been even dumber.
2. Connor and Maria are hypothetical.
On any given Friday, it's not a great idea to label Isaac Newton a failure. I mean, the guy invented calculus.1
But even Isaac couldn't predict the markets, and he got swept up in irrational exuberance and lost a fortune in the South Sea Bubble.2 If you didn't like calculus in high school or college, this might make you somehow feel better. But I want you to remember this the next time someone opines to you on the level of the market: the guy who invented calculus had no insight into the great bubble of his day. Markets cannot be predicted.
But you have to know something, right? We can't all be Socrates walking around saying "All I know is that I know nothing." This Socratic Paradox is fun when you're a sophomore in college but no way to plan for retirement.
The market is close to its all-time valuation high, going back 230 years.3 We know this. We don't know whether it is worth this amount or not, as that requires a perfect prediction of the future business state of the United States and the world. With billions of "votes" per day, the markets have settled on the idea that the future looks bright. And the aggressive rise in the market could continue for some time. It could continue for a long time.
But we don't know, and optimism can fade to pessimism quickly. It would certainly be historically normal for the market to go flat or down for the next three to five *years*. Note that I didn't say "minutes" in this era of immediacy, I said "years." This is something you should think about now, as it almost certainly will happen. We just don't know when.
If you are reading this and thinking "this is not helping me, you just said two different things," you are correct. The point is that market predictions are worthless.
So what to do? We turn to what is controllable.
This is a critical thing to know about investing: whatever your risk allocation in your portfolio is, it is independent of time. In a well-structured portfolio, the risk you are willing to take now is the same risk you should be willing to take in a future time period, regardless of time, and regardless of what is happening around you.
If you are comfortable with, say, 70% of your assets in stocks now, and stocks decline 30%, you should still feel the same level of comfort with 70% of your assets in stocks after the decline. The frenzied activity of the business world, the markets, and the political world should not affect the asset allocation reasoning.
Life events, age, working status, and your capital level may change the risk profile of the portfolio (and we prefer to do this gradually, in a premeditated way). But the level of the market, and the events of the world, should not affect portfolio construction. If they do, you'll start to make decisions in hindsight, much like Isaac Newton.
Dan Cunningham
1. German mathematician Gottfried Leibniz was working on calculus at the same time as Newton, and arguably deserves more credit for the form used today.
2. Newton was rich before the bubble, and had been a cautious investor his entire life. But he lost a good chunk of his fortune, around $20 million today, in the collapse. He still died wealthy due to his prior success. Extended history.
3. Market valuation source: Burton Malkiel, NYT, 8/15/25.
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