Indices at all-time highs – what happens next?
The year has seen record highs for US, Japanese, European and UK stock markets, among others. How should investors and traders react?
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.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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