Monday, December 02, 2019

Investing At All Time Highs In The Equity Market

One difficulty for investors in the U.S. market at the moment is the fact it seems to be hitting new highs on what seems like a daily basis. What gets missed by investors though is a market reaching new highs is actually a bullish signal and tends to be a precursor to additional highs. Below is a chart of the S&P 500 Index provided by The Kirk Report and the red dots show instances where the market achieved ten plus new highs within the last twenty trading days. Following the red dot periods the market tends to achieve additional highs. A table that accompanied the chart highlighted, since 1945, in the periods following the 10+ highs in 20 Trading days, the market was up an average of 8.6% one year later, and positive 72.8% of the time.

Supporting this 'strength begets strength' attribute, Ryan Detrick, CMT, Senior Market Strategist at LPL Financial, notes these new highs tend to occur in clusters. In a recent Twitter post Ryan included the below chart.

The other factor facing investors is the strength of returns in the U.S. this year. Through November, S&P Dow Jones Indices reports the S&P 500 Index total return for the first eleven months of 2019 equals 27.63%. Nearly every equity index has a positive return with the weakest positive in the energy sector, returning 5.46% this year. Negative returns are seen in a few of the commodity areas like Agriculture, -4.56% and Livestock, -6.93%. Investors might believe a strong returning year is a negative for equity returns in the following year. As the below chart shows though, in years where the S&P 500 Index is up greater than 20%+, 79% of the time the market is higher in the next year with an average gain of 13%.

In an environment where the equity market is reaching multiple new highs in a given year, one should not construe this as a negative for future returns. In a November article written by Ben Carlson in Fortune titled, All-Time Highs Are Both Scary & Normal, he notes, "Since World War II, the stock market has spent nearly 40% of the time within 5% of all-time highs while 54% of the time stocks have closed within 10% of an all-time high." Market highs are not necessarily a bad omen for equity investors.

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