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Approaching old peaks: so what?

Stock markets around the world are closing in on the index levels achieved before the last bull market turned into a bear market. With hindsight, we can view the old peaks as bubble territory, inflated by foolish notions about technology. Six years later, it is tempting to think the same levels must again be dangerous and to view any near-term weakness as the end of another bull run.

In real terms, adjusted for inflation, and allowing for the long term trend in 'total returns' (including income) for major equity markets, today's levels are mostly not far from half the equivalent peak. That doesn't tell us anything about what will happen next. But it does mean the downside risks are no greater than 'normal', and no greater than the upside potential, whereas at high deviations above trend the odds are stacked against you, with much greater downside risks than upside potential.
Stuart Fowler on 05.08.06 @ 07:33 PM GMT [">more..]