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10 reasons why stock market highs should not be feared
We are often asked whether stocks should still be bought while markets are trading at, or very close to, all-time highs. Here our investment managers set out 10 reasons why stock market highs shouldn’t necessarily be a concern for investors.
1. Stock markets make new highs all the time
As an example, over the period seen in the graph below (1989-2021), the US stock market has made 871 new highs. For 57% of this period, the market has traded within 5% of its prevailing all-time high. So far this year, the market has made 55 new highs, but this is by no means unusual. For example, there were 67 new highs registered in 2017 and yet, at the end of August 2021, the market was 81% higher than its end of 2017 level. In 1995, the market made a record 88 new highs.
2. Stock markets go up more than they go down
Equity indices tend to rise over time. If this was not the case, they would eventually become worthless. Again, looking at the US stock market, it has risen 54.5% of the time, and fallen for 45.5%. The average gain on up days is 0.4%; the average fall is 0.35%. While these differences might not seem substantial, over the long term the cumulative impact can be massive.
3. A stock market is a market of various stocks
Stock markets comprise many different types of company and even if the stock market itself is trading at an all-time high, not all of its underlying constituents will be. As of 13 September 2021, 206 companies within the main US market were trading more than 10% below their 52-week peak. There were 60 companies which were more than 20% below their high for the past year. Irrespective of stock market levels, individual stock opportunities will always be present. If market levels are a concern, there are always companies which are well below their highest price.
4. It is time in the market that matters, not market timing
Market timing – focusing heavily on when the best time might be to buy and sell – plays a remarkably small role within achieving long-term positive returns from equities. To illustrate this, the graph below shows rolling 10-year returns for the FTSE World Index since 1991, including dividends. The graph shows there have been only 15 months during this time where an investment into this market would not have delivered a positive return 10 years later. And even this was centred around the period ending 2008/2009, which was the height of the global financial crisis. Of course, these returns are illustrative only and actual returns would have varied depending on an investor’s specific portfolio.
5. Trying to be too astute can be costly
Trying to time market purchases too shrewdly, hoping to invest at a lower level, can significantly detract from returns if the market delivers strong returns while you're waiting. This potential opportunity cost can be seen by the fact that if you missed just the 10 best weeks over the past 20 years, the returns from the market would be significantly reduced.
6. It’s corporate profits that matter
Corporate profitability is inextricably linked to stock market returns over the long term. While the pace of earnings growth might slow moving forward, there is currently little reason to expect earnings to decline, unless there is an economic recession.
The left-hand side of the graph shows the level of the US stock market, while the right-hand side axis shows trailing 12-month earnings per share. Both have consistently risen over time.
7. Economic recessions, not market levels, are key
The time to be concerned about equity markets is when a bear market is imminent (a bear market is when a market experiences prolonged price decline; typically securities prices fall 20% or more from recent highs). Ultimately, bear markets are most often caused by US economic recessions which, in turn, are most often caused by the US Federal Reserve (Fed) raising interest rates to a level which curtails economic activity. 2020’s recession, which officially lasted a mere two months to April and was the shortest on record, is a clear exception.
We do not believe we are currently in any real danger of a further recession. The Fed is only just beginning to consider the appropriate time to reduce the pace of their bond purchases. They have also been at pains to point out that this does not predetermine that interest rates will rise at a certain point in the future. We are a long way from US interest rates approaching a level which runs the risk of causing a recession.
8. Market levels are not the same as valuations
We admit that US stock market valuations are high relative to their history, although the current low level of interest rates provides considerable valuation support. Valuations are also a very poor timing tool; stock markets can stay over- or undervalued for a considerable time. If you are concerned about US valuations, we would highlight Europe, Japan and the emerging markets as regions where valuations are not as extreme.
(A forward price-earnings ratio is calculated by dividing the current share price by the earnings per share. It shows how much investors are willing to pay per pound of earnings.)
9. You could be missing opportunities
Irrespective of market levels, equity markets will continue to provide good opportunities to access new and exciting investment themes. As just one example, the considerable opportunities presented by ESG-related investments, such as clean energy, cyber security, robotics, environmental protection and sustainable food production, can only be readily accessed via equity markets. All offer considerable potential, and investors would be remiss if a concern about stockmarket levels meant that the opportunity to invest in these areas was missed.
10. There is no need to fear the future
People can always find reasons to hold off investing in equity markets. Geopolitical concerns, economic challenges, fears of 'catching a falling knife', or high stock market levels have all been used as excuses at various times. History would suggest that, most of the time, these fears prove unfounded.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.
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Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.
Investment involves risk and is not suitable for everyone.