Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

News that stock markets are reaching new all-time highs can be taken two ways by investors. 

On the one hand, higher market levels mean portfolios have probably risen in value. That’s always welcome. But on the other, it means that those investing now face buying when prices at an aggregate level are already high.  

It’s basic investing logic that buying high leaves less room for returns in the future. Some might even be tempted to pause their investing until a more attractive entry point comes along. 

But this simplistic logic does not tell the full story. In fact, when you consider the long-term behaviour of markets, sitting on the side lines when markets peak could be a mistake.  

New Year, new high

First - let’s be clear on which market has hit an all-time, and why. The S&P 500 is the index which has now broken new ground, first hitting a new record closing level last Friday and then exceeding it on consecutive days this week to sit at 4,868 points by the close of play on Wednesday. 

Claims of ‘stock markets hitting new highs’ are justified on the basis that the S&P 500 is the headline index for the world’s largest stock market, and the one that investors will likely have the most exposure to. 

Not all stock markets are in record territory. At a global level, measured by the MSCI World Index, stocks markets remain slightly below their record high set in December 2021. 

The S&P 500 is weighted by market capitalisation, meaning the biggest companies take up a bigger share of the index. That matters a lot right now because the bulk of returns have come from a relatively small number of the very biggest companies. The all-time high achieved last week is mostly down to their strong performance. You can read more about those ‘Magnificent 7’ here.  

Beyond these names, the market has risen by far less. An index which applies equal weighting to all S&P 500 companies is still 5.5% below its high water mark. Meanwhile, the Russell 2000 index - which represents US small and medium sized companies - remains some 20.9% below its all-time high.  

Market highs - lessons from history

For investors worried about investing when markets are near record highs, it’s worth understanding the returns that have been achieved following previous moments when new records have been set. 

Using data going back to 1971 it's possible to identify each occasion the market has reached a new high - there have been many hundreds - and then work out returns from those dates. 

The chart below shows the average three-year and five-year annualised returns achieved by investing when the S&P 500 has hit an all time high. You can see that returns from these moments have been only marginally lower than the long-run average across the period.  

The annualised 5-year return dips from 11.2% to 9.7% when investing at a market high - lower but still very healthy.

Those results are perhaps no surprise when you consider that markets have tended to rise over time and new record highs have routinely occurred. In fact, according to analysis by UBS1, the S&P 500 has traded within 5% of a record high 60% of the time, and only 12% of the time more than 20% below its last all-time high. In other words, investing when markets are near a new high is not a rare occurrence - it is the natural state of affairs. 

Will the market burst past its peak this time?

There’s nothing to say that the experience of the past will be repeated again this time. That depends on conditions now. As explained above. The strong recent performance of the S&P has been driven by a small number of companies which share some common characteristics. They tend to be capital-light, operating in expanding markets, hold technological advantages and be able to boast of strongly growing profits. 

Conditions in the past year have been favourable for this group. The expectation that interest rates will soon fall has made these companies look more attractive, primarily because the strong and growing profits they are expected to make in the future look more valuable if rates and inflation are lower. 

It follows, then, that any news which damages this hoped-for scenario will weigh heavily on these companies, and on the stock market as a whole. To stay on course, we may need to see inflation continue to come down and then interest rate cuts in the first half of 2024 at the latest. 

General economic growth will also be important. If economies can grow more quickly then the chances rise that other parts of the stock market can also recover, and the high levels of stock markets we see now will be even more justified. 

None of this is certain, of course. For ordinary investors, attempting to pick the best moments to enter or leave the market is almost impossible to get right. Thankfully, as history has shown, strong returns are achievable even when markets look high.

(%) As at 31 Dec

2018-2019

2019-2020

2020-2021

2021-2022

2022-2023

S&P 500

31.5

18.4

28.7

-18.1

26.3

Source: Refinitiv, total returns in local currency, 31.12.18 to 31.12.23.

Past performance is not a reliable indicator of future returns  

Source: 

1 UBS, 23 January 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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