Breaking records

The S&P 500 index once again “broke” its all-time high, surpassing 5,000 points.

Thus, investors focus on the U.S. stock market and cautiously watch its future. But how relevant is reaching a new record?

First, the S&P 500 is calculated based on the price changes of each of its members. Therefore, it's logical for it to rise as companies' earnings increase. So it doesn't make much sense to draw conclusions about its absolute levels. That would be equivalent to saying that growth in the U.S. is threatened because the level of nominal GDP reached its all-time high. Better metrics are those that incorporate valuations relative to cash flow or asset value. Examples are the price/earnings ratio and price to book value.

Someone could say that the absolute level could nonetheless have an effect on investor sentiment. It's true that some historical crises such as the “dot-com Bubble”

of 2000 and in 2008 were preceded by nominal all-time highs of the index. However, analyzing from 1988, on average the 1-, 3- and 5-year forward returns after a high (14.6%, 50.4% and 78.9%) are higher than on any given day

(11.7%, 39.1% and 71.4%).

Therefore, the important thing is not to be alarmed by the headlines or try to time the market, since the probability of being wrong is very high. Every well-

structured portfolio should have relevant exposure to the U.S. stock market as part of the equity strategy. In the long term, it's the only way to break your own

wealth records.

Original publication, La Segunda