GREAT BARRINGTON — As we reach the end of July we are also approaching a new all-time high for stock markets. The people that have been waiting on the sidelines by holding cash might be asking themselves, "have I missed the boat?"
We know that markets tend to go up and down. Volatility is what defines stock markets. If our goal is to buy low and sell high, then what does it mean if we're looking at a market that has reached a new all-time high? Does it mean that you should stay away and wait for the market to pull back? Looking back at some historical data, I find that the answer is probably not.
Looking at monthly data for the S&P 500 Index since December 1927, there have been 184 months when the Index finished higher than any time in its history. There have been long stretches where we did not reach new highs, such as the Great Depression, after which the market remained below its all-time high for 25 years. However, on average we reach a new high about once every six months. Reaching a new high is newsworthy, but it's nothing new. Prices tend to rise over time.
The previous all-time monthly high for the S&P 500 was at the end of May 2015, so it's been a little while since we've had one. Now that we're at the high, what are the chances that an investment in stocks is higher in the next few months or years?
Of the 184 times that we've ended the month at an all-time monthly high, the total return the following month was positive on more than 60 percent of occasions (the total return includes the effect of dividends). The average monthly return in the month after the S&P 500 reached a new monthly high was 0.9 percent
Six and twelve months following the new all-time high the results are even better. Of the 184 times that we've touched a new monthly high, total returns have been positive on about three in four occasions over the following 6 and 12 month periods. In 12 months following a new high, the average total return is an astounding 11.1 percent.
However, anyone investing in stocks should have a horizon much longer than 6 or 12 months. I typically look at 10 or 20 years. What can we expect over 10 or 20 years from a new stock market high? Once again, the returns are good. Of the times we've reached a new high and we have at least 10 years of subsequent data, returns have been positive almost 87 percent of the time.
Finally, if we look at longer stretches, we find that 100 percent of the time that the S&P 500 has touched a new high, total returns have been positive over the subsequent 20-year period. This includes the 20-year period starting in August 1929, just before the Great Depression knocked the stock market down over 85 percent. Even though the level of the S&P 500 was below its peak for 25 years, the positive impact of dividends resulted in a total return of plus 45 percent during the 20-year period after the August 1929 peak. The average total return across all of these 20-year periods: over 500 percent.
All of these mind-numbing numbers boil down to this: just because the market has reach a new high does not necessarily mean that it's bound to go down. Investors waiting on the sidelines for an "inevitable" crash may have a long wait. There's no guarantee that they'll ever find a more attractive price to buy stocks.
Luke Delorme is the director of financial planning at American Investment Services (AIS) in Great Barrington. He can be reached at firstname.lastname@example.org. Past performance is no guarantee of future results. This information should not be considered personal investment advice.