Resisting complacency in the stock market
You won’t have to search for long before you find a headline blaring a warning that the market is too high. Or too richly valued. Or it’s been these many days since the last recession. Or these many days since the previous bear market. It’s not profound to state that each day brings us closer to a market peak because we’re always one day closer to a market peak. (Conversely, we’re always one day closer to a market bottom, so these types of statements carry little significance.)
A recent Wall Street Journal article1 put an interesting spin on the subject. The article notes that “Stocks have experienced only brief downturns over the past 16 years, creating dangerous complacency.” What that means is that many investors have never experienced a prolonged market correction. (NOTE: A market correction is defined as a drop of 10% or more.)
Worse, an increasing number of investors have never experienced a prolonged bear market, defined as a knee-buckling drop of 20% or more. Rather, over the past 16 years, investors have been exposed to market corrections and bear markets that have been relatively brief, as in April 2025. (You probably blinked and missed it.) Unfortunately, complacency sets in when investors believe that any drop will result in an immediate recovery. More seasoned investors know that is nowhere near the truth.
As the article notes, “In the past century, there have been 25 bear markets, including some that barely met the definition…The average time to reach the previous high when a bear market was accompanied by a recession was 81 months. It took just 21 (months) without a recession. Over the past 16 years, downturns have lasted less than eight months before the old high was reached.”
The crippling bear market that began in 2007, when stocks lost more than half their value, took 66 months for the S&P 500 to regain its previous high. When you realize that investors under 40 have never experienced a downturn that lasted anything close to five and a half years - not to mention the lost decade of 2000-2009 - one wonders how ‘young’ investors will react when they realize the market bounce back is taking longer than they’ve ever experienced.
While we all may know that bad things ultimately happen to markets, there’s no predictability as to when a bear market or recession will occur. Jeff Sommer, writing in the New York Times2, notes that “Investors’ odds of success are better if they just hang on and aim for average returns…Most of us are better off living with the reality that the stock market moves down as well as up, and that we can’t beat it.”
Citing extensive research by Dimensional Funds - Sommer reports there are no strategies that can be followed to time markets. “Timing the market is, for the vast majority of us, a recipe for losses. It may work sometimes, but it’s unlikely to work all the time. The problem isn’t just knowing when to sell. You also need to know when to get back into the market, and getting both decisions right – selling at a peak and buying at a trough – is rare in any single market cycle. Over decades, it may be impossible.”
Striving for average market returns isn’t exciting, but it works, and we strive to accomplish that by paring equities as markets hit highs, and buying equities when markets move toward lows. (In a word: rebalancing.)
There is one headline, however, that is worth noting3. “For the second time ever, U.S. stocks have crossed a valuation milestone suggesting low future returns.” In research that is most commonly linked to Nobel Prize-winning economist Robert Schiller, “Schiller looks back at 10 years of earnings and adjusts them for inflation to cover an entire business cycle. It recently broke above 40 for the second time ever.” Since the first time was in 1999, which preceded the period commonly known as the lost decade, this merits further examination.
Schiller’s metric forecasts large cap growth stocks, such as the Magnificent 7, will have small negative returns over the next decade; US small cap and US large value are forecast to have modest positive returns; and International and Emerging Markets are expected to perform at higher levels.
What’s the best thing we can do after reading all the headlines? If we can’t predict market downturns (and we can’t), and if we can’t predict the recessions that often go with them (and we can’t), at least we can hold a diversified group of assets within our portfolios and rebalance, rebalance, rebalance. We’re not looking for sexy; we’re looking for results.
1 Jakab, Spencer. “Why We Could Use a Good, Long Bear Market.” The Wall Street Journal, 17 Nov. 2025.
2 Somers, Jeff. “In the Stock Market, Don’t Buy and Sell. Just Hold.” The New York Times, 26 Nov. 2023.
3 Jakab, Spencer. “This Famous Method of Valuing Stocks Is Pointing Toward Some Rough Years Ahead.” 4 Nov. 2025.
S.F. Ehrlich Associates, Inc. (“SFE”) is a registered investment advisory firm in New Jersey that offers investment advisory, financial planning, and consulting services to its clients, who generally include individuals, high net worth individuals, and their affiliated trusts and estates. Additional disclosures, including a description of our services, fees, and other helpful information, can be found in our Form ADV Part 2, which is available upon request or on the SEC's website at www.adviserinfo.sec.gov/firm/summary/121356.
If you are an existing client of SFE, it is your responsibility to immediately notify us if there is a change in your financial situation or investment objectives for the purpose of reviewing, evaluating or revising any of our previous recommendations and/or services.
This newsletter is for informational purposes only and is not intended to be and does not constitute specific financial, investment, tax, or legal advice. It does not consider the particular financial circumstances of any specific investor and should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge you to consult with a qualified advisor before making financial, investment, tax, or legal decisions.
Information contained herein has been obtained from sources believed to be reliable. While we have no reason to doubt its accuracy, we make no representations or guarantees as to its accuracy. The opinions and analyses expressed herein constitute judgments as of the date of this newsletter and are subject to change at any time without notice. Any decisions you make based upon any information contained in this newsletter or otherwise are your sole responsibility.
No graph, chart, formula, or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions.
Any securities mentioned in this newsletter are for illustrative purposes only and should not be construed as investment advice or a recommendation to buy or sell. There is no guarantee that a particular client's account will hold any or all of the securities mentioned in this newsletter. Additionally, from time to time, SFE’s officers, directors, employees, agents, affiliates, or client accounts may hold positions or other interests in the securities mentioned in this newsletter.
Any historical index performance provided herein is for illustrative purposes and includes the reinvestment of dividends and income, but does not reflect advisory fees, brokerage commissions, and other expenses associated with managing an actual client account. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. Index performance does not represent actual account performance. One cannot invest directly in an index. A description of each index mentioned in this newsletter is available upon request.
Any hypothetical performance shown or discussed herein is for illustrative purposes only. Hypothetical performance results have inherent limitations, including: they are generally prepared with the benefit of hindsight; do not involve financial risk or reflect actual trading; and do not reflect the economic and market factors, such as concentration, lack of liquidity or market disruptions, trading costs, and other conditions, that might have impacted our decision-making when managing actual client accounts. Since trades have not actually been executed, hypothetical performance results may have under- or overcompensated for the impact, if any, of certain market factors.
It should not be assumed that future performance of any specific investment, investment strategy, or index (including any discussed in this presentation) will be successful or profitable or protect against loss.
Any forward-looking statements or projections herein are based on assumptions. By their nature, forward-looking statements involve a number of risks, uncertainties, and assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. You should not place undue reliance on forward-looking statements, which reflect our judgment only as of the date this newsletter was published.