​​​​Indices at all-time highs – what happens next?

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The year has seen record highs for US, Japanese, European and UK stock markets, among others. How should investors and traders react?

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Written by: Chris Beauchamp | Chief Market Analyst, London

 

Publication date: Monday 20 May 2024 13:36

While many investors may feel nervous about the potential for a fall, historical analysis shows that investing when the stock market is at an all-time high can actually be a profitable strategy in the medium to long-term.

The US stock market hits new all-time highs more frequently than one might expect, with new records being set in 30% of months since 1926. On average, 12-month returns following an all-time high have been 10.3% above inflation, better than the 8.6% for periods not at new highs.

No need to fear new highs

The impact of avoiding the market after new highs can be severely detrimental to long-term wealth creation. Data from Schroders shows that a $100 investment in the US stock market in January 1926 would be worth $85,008 by the end of 2023 in inflation-adjusted terms, representing a 7.1% annualised return.

However, a strategy that switched to cash whenever the market hit a new high would have resulted in a much lower terminal value of just $8,790 – 90% less.

Short-term picture more mixed

No investing strategy works 100% of the time. New highs are often followed up by other record highs, but pullbacks are a feature, not a bug, of even the strongest market rallies. Some are short-lived, such as the recent April pullback in US indices, but others can go on for much longer.

If a trader’s horizon is more short-term, then it is prudent to make sure they are following the price trend in their chosen timeline, but also the longer-term trend.

All-time highs not a reason to turn bearish

While feelings of nervousness are normal when stock markets reach unprecedented levels, historical data clearly demonstrates that there is no rational reason to fear investing during periods of all-time highs. The market setting new record levels should not, in itself, deter investors from participating in equity markets.

Other valid considerations may exist, but the all-time high level alone is not a justifiable reason to dislike stocks.

 

 

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