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
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.
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.
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