Stock Market New Highs. Now What?
That escalated quickly. About six months ago, a global pandemic started to spread around the world, infecting over 20 million people and taking almost 750,000 lives. Meanwhile, the U.S. economy shut down for a month, leading to the largest drop in GDP and highest unemployment numbers since the Great Depression.
Over in the stock market, we’ve experienced the fastest drop in the market and fastest snapback. Incredibly, it took only 126 days to get back to the new all-time highs.
Now What? This is a very natural question many investors are pondering at historic market highs. Your next step largely depends on your investment plan and process of course. When you need the money and your suitable asset allocation dictate most of what you do and not do at this stage.
Looking at history, as shown in the table below, stocks turn in subpar returns after reaching new highs versus all other times in the short-term. However, longer-term, beyond 6 months and up to two years, the market turns in modestly better returns compared to all other days post historic highs.
The market’s outperformance post all-time highs can be tied to the market signaling better economic news ahead. Consistently rising prices can also attract more and more buyers into the market.
Source: Y Charts
Of course, there’s always the never-ending market wall of worry to be mindful of. Below is a list of the top-of-mind worries by professional investors.
A big source of interest and worry for many investors is the upcoming U.S. presidential election. The upcoming November election is expected to be more turbulent than past elections from both a news and market perspective. From the chart below, investors are paying up a lot more to hedge against this anticipated volatility than in the past four presidential elections.
Judging from past presidential elections, U.S. stocks have historically struggled somewhat in the months leading up to the actual vote. However, like how markets perform 2+ months post historic highs, stocks regained their previous trajectory and headed higher.
Looking at this historic data especially with a major catalyst like the U.S. presidential election, all-time highs are not always an all-clear indicator. Like in any other market period, these signals don’t exist. Ever. Market highs, election cycles and volatility come and go over the investment journey. Knowing what your portfolio needs to return over time and having a suitable process to manage the investments are keys to managing unexpected volatility and the relentless news cycle. This process and plan remain your best investment companions now and along the way.
David Hone, CFA