Investing Near New Market Highs
With stock indices continuing to set new highs over the past several decades, does this mean negative returns for stocks are on the horizon? Many investors view new highs in the market as a warning sign that stocks must soon drop. Fortunately, the evidence tells us otherwise. Investors would be wise to embrace new highs in the market, as new highs are normal and to be expected.
History can help illustrate this point and show us that a market index reaching an all-time high is not something investors should fear.
Exhibit 1: S&P 500 Index Total Return Highs
Percent of cases where index is higher after monthly closing high vs. any monthly closing level January 1926–December 2017
For illustrative purposes only. Average gain is a simple average of all positive returns for the 1-, 3-, or 5-year periods analyzed. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Exhibit 1 measures monthly closing levels of the S&P 500 Index from the beginning of 1926 to the end of 2017. Here are some takeaways from the data:
- Of the 1,103 months observed, almost one-third represented new closing highs for the index.
- Looking ahead on a one-, three-, and five-year basis, the percent of cases when the index was higher after a new market high is about the same when compared to any other previous price level. For example, for a three-year look-ahead period, the index was higher around 84% of the time after hitting a new closing high as well as after any other previous level.
- The average return experienced after those highs vs. any other level is also quite similar. For example, for the three-year look-ahead period, the average cumulative return after a new high was 51.1% vs. 51.8% for any other level.
- In the vast majority of time, new index highs have historically been followed by even higher levels in subsequent years.
Since markets generally tend to go up over time, new highs should be a relatively common occurrence. Considering this, it is worth posing the question: If prices increasing over time was a troubling development, what would be the point of investing at all?
The question of whether new market highs portend a fall in stocks can often be translated to other, more general questions: “Is now a good time for me to be invested?” or “Should I sell and take my profits near a market high?” While the historical data suggests we may see higher levels in the future regardless of where the markets are today, the more appropriate answer is highly dependent upon an investor’s unique situation and their risk and return objectives. For investors concluding stock market exposure is appropriate, a disciplined approach with a long-term view is likely a more prudent course of action than reacting to new market highs.
If you have any questions, please reach out to your M. Griffith advisor.