Investing at All-Time Highs

February 22, 2024 By Ryan Streilein, CFA
Man Leaping in NY Stock Market. West Financial Services.

It can be nerve-racking investing at all-time highs in the stock market. Should it be? The data says no.

The past is not predictive of the future, but it helps paint a picture of potential outcomes. Let’s dive in by studying annual stock market (S&P 500) return data from NYU (source). Since 1928, the stock market has had positive years around 73% of the time, with an average annual gain of 11.7%. The average masks the large variance in outcomes, with the lowest return of -43.8% coming in 1931 (Great Depression) and the highest return of 52.5% coming in 1954 (post-recession). The annual return also masks the intra-year volatility of equities. The good news for savers is, historically stocks have gone up over the long run (see my prior article explaining why). 

So, what happens when we end the year at a new high? The data tells us that the following year is positive 71.7% of the time boasting an average return of 10.2%. That said, the range of outcomes following new all-time highs contains a low of -36.6% (Great Recession) and a high of 37.2% in 1995 (start of the dot.com bubble). In this scenario, the average return is a bit lower, and the range of outcomes is tighter. For more detail, return distribution below counts the percent of years that the market return lies in the various return ranges. This was run for all the years (1928-2023) as well for only new annual all-time highs. 

Return distribution counts the percent of years that the market return lies in the various return ranges. This was run for all the years (1928-2023) as well for only new annual all-time highs (ATH). Left axis has % of total occurrences ranging from 0% to 40%. S&P return ranges are on the horizontal axis ranging from less than -20% to greater than +20%. S&P return range less than -20%: % of total occurrences for all years is 6.3% and 3.8% for 1-year after ATH S&P return range -20% to -10%: % of total occurrences for all years is 6.3% and 5.7% for 1-year after ATH S&P return range -10% to 0%: % of total occurrences for all years is 14.6% and 18.9% for 1-year after ATH S&P return range 0% to +10%: % of total occurrences for all years is 15.6% and 17.0% for 1-year after ATH S&P return range +10% to +20%: % of total occurrences for all years is 20.8% and 22.6% for 1-year after ATH S&P return range greater than +20%: % of total occurrences for all years is 36.5% and 32.1% for 1-year after ATH

Source: NYU Data, WFS Analysis

I know what you are thinking, the market just went up 26% in 2023, surely the party stops here? You are probably getting sick of this, but once again let’s go back to our data. In years where the stock market gains more than 25%, the following year is positive 64% of the time, generating an average return of 8.7%. Comparatively, a bit lower than the long-term average, but still solid. In fact, the market has historically ended the year at a new all-time high ~57% of the time and you are more likely to gain 25% (35 times) than the market be negative (26 times). 

Source: NYU Data, WFS Analysis

For those that like a more granular analysis utilizing daily all-time highs, this piece from RBC is good. The takeaways are the same. Stocks tend to rise over time and the longer the time horizon, the higher chance of success. New all-time highs are normal and should not be feared! We don’t know what the future will hold, but as the adage says, it's not about timing the market, but about time in the market.

Annual returns and intra-year declines: This chart shows intra-year stock market declines (red dot and number), as well as the market's return for the full year (gray bar). Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2023, over which time period the average annual return was 9.0%. Left axis has percent of return from -60% to 40%. Horizontal axis has time periods, every 5 years beginning with 1980 to 2023. 1980: lowest point was -17%, year ended up at 26%. 1985: lowest point was -8%, year ended up at 26%. 1990: lowest point was -20%, year ended down at -7%. 1995: lowest point was -3%, year ended up at 34%. 2000: lowest point was -17%, year ended down at -10%. 2005: lowest point was -7%, year ended up at 3%. 2010: lowest point was -16%, year ended up at 13%. 2015: lowest point was -12%, year ended down at -1%. 2020: lowest point was -34%, year ended up at 16%. YTD: lowest point so far is -2%, highest point so far is 2%.

Source: https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/ 

Additional Reading & Great Blogs to Follow:

  1. https://ofdollarsanddata.com/should-you-invest-in-stocks-at-all-time-highs/
  2. https://awealthofcommonsense.com/2024/01/what-comes-after-a-good-year-in-the-stock-market/ 

 

Meet Ryan Streilein, CFA »

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