All-Time Highs in the Stock Market are Meaningless
Many people express concern about investing in the stock market when the indices are at an all-time high. But a recent peak does not tell you whether the market is particularly expensive or cheap at any given moment. Rather, it's just part of the historic tendency for stocks to rise over time. As an investor, you are, after all, rooting for stocks to go up.
Record highs are not particularly rare -- around 5% of all trading days since 1928 have seen a new all-time high according to advisor/blogger Ben Carlson.
Carlson admits that, at some point, an all-time high may be the top for a while. For example, it took the market 5-1/2 years to recover from the Great Financial Crisis over a decade ago. The problem is that you just don't know when a particular all-time high is the top for an extended period or just another step upward.
Investing at all-time highs may not be as hazardous as you might think. A JP Morgan study compared the results of investing on any random day since the start of 1988 with investing on days when the S&P 500 closed at an all-time high. On average, investing on the "high days" had better returns over 1, 3, and 5 year periods.
There are multiple factors that impact stock returns -- corporate profits, interest rates, inflation, politics, fear, greed, pandemics, and so on. The current level of a stock index does not seem, however, to be a useful gauge of future returns.
As Carlson summarizes his approach: "If you plan on being in the stock market over the long-term, you're going to have to get used to the fact that stocks mostly go up over time and new highs are completely normal ... Eventually, one of these highs will be the top. Just know that there are so many highs in the market that it's impossible to predict with any degree of certainty which one that will be."
Since the Great Depression, new all-time highs for the S&P 500 Index have been a common occurrence:
Words of Wisdom
It is a mistake to try to look too far ahead. The chain of destiny can be grasped one link at a time. -- Winston Churchill