Elections, Predictions, New Market Highs – What’s Next?

By Laura Chiesman

If 2016 taught us anything it might be that predictions and the headlines that proclaim them with such certainty, are surely no basis for a plan.

There has been much discussion in the news recently about new nominal highs in stock indices like the Dow Jones Industrial Average and the S&P 500. When markets hit new highs, is that an indication that it’s time for investors to cash out?

History tells us that a market index being at an all-time high generally does not provide actionable information for investors. For instance, we can look at the S&P 500 Index for the better part of the last century. The chart below shows that from 1926 through the end of 2016, the proportion of annual returns that have been positive after a new monthly high is similar to the proportion of annual returns that have been positive after any index level. In fact, over this time period almost a third of the monthly observations were new closing highs for the index. Looking at this data, it is clear that new index highs have historically not been useful predictors of future returns.

S&P Total Return Index Highs: 1926–2016
Percent of Months With Positive Return Over Next 12-Month Period

S&P Total Return Index Highs

From January 1926–December 2016, 319 months, or approximately 29% of monthly observations, were new closing highs. Note: 1,081 monthly observations. The S&P data is provided by Standard & Poor’s Index Services Group. For illustrative purposes only. Index is not available for direct investment. Past performance is no guarantee of future results.

If the new all-time highs in equity markets are not useful predictors of future returns, what about the opinions of the financial media? Depending who you read or listen to, either stormy seas or pots of gold lie ahead. For some context let’s look back over some past headlines.

The following chart shows the growth of a dollar invested in the MSCI World Index from 1970 through 2015 along with some of the headlines that encouraged investors to “get out now” over this same period.

Prediction-Season-Exhibit

Growth of a dollar—MSCI World Index (net dividends), 1970–2015
In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2016, all rights reserved.

Historically speaking, over longer time horizons, the odds of realized stock returns being positive have increased.¹ This is one reason why investors should consider investing a long-term commitment: Staying the course and not making changes based on short-term predictions increases your likelihood of success.

If you haven’t yet charted a road map to achieve your dreams, the WealthCoaches™ at our wealth services firm in Satellite Beach, FL – Melbourne/Brevard area are here to help you plan for your future. For more information give us a call at (321) 773-7773 or visit our website at www.firstwavefinancial.com today!

 

¹Market is Fama/French Total US Market Index. T-Bills is One-Month US Treasury Bills. There are 877 overlapping 15-year periods, 937 overlapping 10-year periods, 997 overlapping five-year periods, and 1,045 overlapping one-year periods.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this publication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.
Share