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As has been previously noted in this space, many retail investors have acute trepidation regarding allocating to stocks after new all-time highs are notched. However, data confirm there is merit in doing just that.
Not to brag, but I covered this exact topic on April 17 (and prior to that). On that day, the SPDR S&P 500 ETF (SPY) was admittedly in the midst of a minor pullback after reaching an all-time high and closed at $500.55. The exchange traded fund closed at $526.10 on May 29, a couple of days after the S&P 500 itself hit another record. Point is an investor that sold at SPY’s prior all-time high left money on the table because another record was set just days or weeks later.
That is to say in equity investing, highs often beget more highs. While that sounds counterintuitive to many investors, particularly those that are new to the game, the proof is in the pudding. The 2024 calendar hasn’t even reached June, but already (as of May 29) the S&P 500 has hit 24 all-time highs. Translation: Selling at the previous highs wasn’t all it was cracked up to be. In fact, it proved to be a mistake.
Of course, there no guarantees in investing. Past performance isn’t a promise of future returns, but the odds of further upside are on the side of investors that embrace highs as buying, not selling, opportunities.
Embrace the Highs
Investors should remember what selling at highs implies. The market participant engaging in such behavior, broadly speaking, is assuming no further highs will arrive anytime soon. That amounts to market timing, one of the most foolhardy endeavors in all of investing.
“If there’s any recipe for disaster when it comes to investing, it’s in trying to time the market’s peaks and valleys,” writes Nationwide’s Mark Hackett. “Long-term investors may feel skeptical about pouring savings into a frothy market, but staying invested and sticking to a long-term financial plan is the more prudent approach to allocating capital. For investors who interpret all-time highs as a contrarian signal to avoid stocks, history shows they will likely miss out on future gains.”
As noted above, investors have been rewarded for buying at highs or staying the course with stocks or funds that have run-up. In the moment, that can be hard to remember and it is true that profits aren’t profits until they’re realized, but with a little bit of patience, more profits could be on the way.
“Yet, historical data show that when markets have reached all-time highs in the past, it hasn’t necessarily indicated impending market drawdowns. In most cases, stocks have surpassed these records and continued to rise,” adds Hackett.
Market History Is Meaningful
While it’s true that past returns aren’t guaranteed to repeat, market history is meaningful in addressing investors’ reservations about buying or selling at all-time highs.
Some of that history includes the vital point that bull markets tend to last much longer than bear markets. Since 1932, the average length of a bull market was 3.8 years, but the average bear market didn’t even last 300 days (289 to be precise). That’s history worth remembering.
“It’s not unreasonable to assume that the current bull market can continue, given the resilience of corporate profits in the latest earnings season,” concludes Hackett. “Investors should remember that earnings are the fundamental backdrop to equity performance. Moreover, stocks are supported by several favorable tailwinds right now, including breadth and rising earnings-per-share estimates, which should lend support to the current market rally.”
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