New Market Highs! Now What?

We’re all reading headlines telling us that the US stock market has reached all-time highs, something that never happened in 2023 despite the US stock market returning nearly 24% for the year (the S&P 500 index of US stocks was up 23.79%).^[1] Many investors who have a worrisome mindset may think these record highs mean that there’s an increased likelihood that we’ll see a downturn in the near future. The markets have nowhere to go but down from here, right?

There’s a kind of logic to this assumption, but history does not support that “logical” conclusion. Since 1973 (the modern stock market era), the S&P 500 index has achieved an average 10.1% positive return over the 12 months following an all-time high. This is actually higher than the average 12 month return from any random day during that same time period (+9.5%). In fact, it’s common for the S&P 500 to continue to reach new highs just days after achieving a record high. Since 1950, 80% of record highs have led to at least one more record high the following week, and the markets generally hit a new all-time high (again, on average) every 19 days.^[2]

If a week or even a year of continued highs after setting a record still seems a bit short-term to you, history tells us, again, that record highs have no predictive value in determining future returns over longer periods, either. If we go back 60 years, since 1964 the average one-, two- and three-year returns of the S&P 500 after a record high are 12%, 23% and 39% (these are aggregate, not annual returns), which is surprisingly close to the 12%, 25% and 38% average aggregate returns for all other (non-record high) one-, two- and three- year time periods.^[3]

This is not to say that the markets will not or cannot go down from here. They can and they might (and most assuredly will, at some point in the future). But the most consistent thing about the markets is that no matter where you start, the overall long-term trend has been positive and returns after all-time highs are, perhaps surprisingly, no exception. The warning “Past performance is no guarantee of future returns.” rings ever true and we’re reminded that past performance also isn’t a very reliable predictor of future returns. Better to build your portfolio on a solid foundation of academic research and evidence, as we do, rather than on the shifting sands of attempting to guess where the market is going to move, next!

Sources:

[1] Return data from www.morningstar.com, as of 12/31/2023.

[2] https://ca.finance.yahoo.com/news/stock-market-history-shows-record-highs-arent-a-bad-time-to-buy-103029686.html

[3] https://www.fxstreet.com/news/sp-500-index-returns-following-record-highs-are-positive-ubs-202401301450

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