What Happens When the Market Reaches an All-Time High?

January 12, 2024

Contrary to common belief, S&P 500 data spanning from 1926 to 2022 challenges the notion that new market highs signal overvaluation or a market ceiling. History reveals that stocks, typically priced for consistent positive returns, often continue delivering positive results after reaching all-time highs, with an 81% likelihood of being higher a year later and an 86% chance after five years. Investors are reminded that while historical patterns offer insights, past performance doesn't guarantee future results, emphasizing the need for prudent consideration of various factors and risks in investment decisions. For more comprehensive financial insights, visit our YouTube Channel

Full transcript:

Hello, welcome to Arista Advice! Question of the week is: "Paul, what happens when the market reaches an all-time high?" When markets reach an all-time high, some investors can have some anxiety, but let's discuss it and review it.

Investors often view new stock market highs as a sign of overvaluation or a ceiling. But the S&P 500 data from 1926 to 1922 tells a different story. History shows that new highs don't always result in market retreats, as stocks are usually priced for consistent positive returns. 30% of monthly observations were new market highs, with average returns closely matching those over any period. After reaching a new high, the S&P 500 was higher a year later 81% of the time. That's a statistic that you want on your side. You don't want a retreat where the 19% of the people are. You want to stay invested.

Always be invested and hang out with the people that have an 80% chance of hitting new highs after new highs are reached. As you'll see on this graph, one year later, after months that have ended a record high, the markets are positive 13.7. After three years, the markets are positive 10.6. On a five year period, the average returns after market high, the markets have and have delivered a 10.2% return. So remember, historical data for the S&P 500 index challenges the common investor belief and the natural human belief that when the markets hit high, it's time to go hide, and that's not the facts. You want to always stay invested. When markets hit new highs because they indicate that there might be an overvaluation, but instead always stay invested and avoid the tendency to continue to receive positive returns for always being invested.

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