Many investors may think a market high is a signal stocks are overvalued or have reached a ceiling. However, they may be surprised to find that the average returns one, three, and five years after a new month-end market high are similar to the average returns over any one-, three-, or five-year period.
- In looking at all monthly closing levels between 1926 and 2020 for the S&P 500 Index, 30% of the monthly observations were new highs.
- After those highs, the average annualized compound returns ranged from nearly 14% one year later to just under 10% five years later. Those results were close to average returns over any given period of the same length.
Reaching a new high doesn’t mean the market will retreat. Stocks are priced to deliver a positive expected return for investors, so reaching record highs regularly is the outcome one would expect.