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What Investors Can Learn from a New Market High

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What Investors Can Learn from a New Market High

Written by: Julia Tierney | Vista Capital Partners

Earlier this month, the Dow Jones Industrial Average and the S&P 500 Index each closed at new all-time highs. The Dow crossed 27,000 for the first time ever, while the S&P 500 surpassed the 3,000 level, a new record.

The financial media loves market milestones such as these. They get people talking about whether the fresh high is a sign of more gains to come or a signal of a looming correction. Experts weigh in, viewers tune in, and the market’s future direction becomes a popular topic at backyard summer barbecues.

But does a new market high tell us anything about where the market is headed?

To help answer this question, we looked at data provided by Dimensional Fund Advisors. The folks at Dimensional examined S&P 500 Index levels at each month end from 1926 through 2018 to identify market highs. From those market highs, subsequent returns over one-year, three-year, and five-year periods were calculated.

Over all one-year periods following a new market high, S&P 500 returns averaged 14%. Over three-year periods, returns averaged 10.4%. And over five-year periods, returns averaged 9.9%.

Keep in mind, the average annualized performance of the S&P 500 since 1926 has been 10%. Far from being a harbinger of negative returns to come, new market highs don’t look a lot different from any other day with respect to future stock returns.

These results shouldn’t come as a surprise. Over time, companies produce higher profits and business values grow. These higher profits and prices push stock markets to higher and higher levels. This means that, even after a market high, we should expect markets to continue to rise over time. (This isn’t to suggest we shouldn’t always be prepared for market turbulence.)

Rather than signaling what’s in store for markets, a new market high is an opportunity to reflect on what matters most:

  • Capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise.
  • A new market high seems no more useful in predicting the market’s future direction than any other day.

By focusing on what we can control (like asset allocation, diversification, and keeping costs and taxes low), we can better position our clients to have a successful long-term investment experience.

Related: Should We Worry About a Recession?

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