Did you buy the dip?

If you’re inclined to ask, “What dip?” I won’t blame you. I barely remember it either, but five weeks ago, US equities were briefly down 5% from the last record high amid doubts about the fate of December’s Fed cut and concerns around a shakeup at the top of the AI leaderboard.

Blink and you missed it. The unsung hero was John Williams, who on November 21 strongly suggested the Fed was likely to cut in December after all, even as the Committee remained deeply divided.

Stocks promptly recovered alongside market-implied rate-cut odds, which went from under 30% prior to Williams’s speech to almost fully priced on the eve of the year’s final policy meeting.

The figure above’s just an updated version of the drawdown chart. The white circle shows the November low.

Although December’s MTD gain hardly counts as gangbusters, any advance for this month would count as the eighth straight, which is to say the S&P’s gained every month since “Liberation Day.”

Headed into Friday’s lackluster, low-volume, post-Christmas trade, the benchmark had notched three new records in December. That takes the total since the S&P reclaimed all-time highs in late June to three-dozen.

There’s the chart. During stretches like these, the joke’s on people like me who, during selloffs, sarcastically remind investors that stocks can go down as well as up. A committed bull might point the visual above and ask, “Are you sure about that?”

This is why you stay invested. Not that the “professionals” among you need a reminder. Or do you? Because in my experience, it’s the pros who need that reminder most.

Stocks do tend to go up over time. The game’s rigged, after all. Losers are shown the major benchmark door, and modern market structure’s been a kind of perpetual motion machine for the better part of two decades.

(Japanese equities used to be bears’ snide trump card — the exception to the “stocks always go up on a long enough horizon” rule. But on February 22, 2024, an entire generation of investors witnessed the first Nikkei record of their adult lives.)

All of that said, valuations do matter, not as a market-timing device, but as a predictor of long run returns. Simply put: If you buy at historically elevated multiples, those shares will invariably underperform shares bought at cheaper valuations.

The figures above, from Goldman, are a snapshot of where things stand in terms of multiples headed into the new year.

Crucially, the implication isn’t that you shouldn’t add equity exposure in keeping with a regular investment schedule. Rather, the point is that if you add exposure to the cap-weighted benchmarks at these multiples beyond what you’d normally be buying as part of an autopilot, dollar-cost averaging strategy, you’re chasing. And chasing when valuations are stretched, let alone this stretched, is tantamount to fire juggling.

I should add the usual caveats. This isn’t investment advice. Consult a local professional in a cheap suit with framed copies of old Barron’s issues hanging in his office. Etc. Etc.