The S&P 500® Index touched a new all-time high at the end of October, its 15th of the year. These 15 new all-time highs appear to be a lot, but they pale in comparison to the 63 new highs the market touched in 2017 when it was gripped with reflation euphoria following the 2016 election. Since then, there have been 104 new all-time highs.1
The notion of the S&P 500 hitting a fresh new all-time high has some prognosticators declaring that the market has reached a top and stocks are stretched.2 Fears of an economic slowdown and geopolitical tensions are fanning those flames. But this behavioral, knee-jerk reaction to a fresh market high is not completely justified by the historical data.
While every all-time high is different, examining the past in relation to the present can provide insight into the underlying dynamics that drove the newest all-time high. These insights can act as a Sherpa to investors following the market’s current ascent higher and help to answer today’s pressing question: Is the market on fragile footing, or does it have enough fuel to keep moving higher?
An all-time high doesn’t mean the end is nigh
So, should an all-time stock market high be cause for concern? Not really. Dating back to 1990, the average market returns over the 3-month, 6-month, and 12-month periods following all-time highs were 3%, 6%, and 13%, respectively.3 This doesn’t mean that returns in those time periods were never negative or that the bottom did not fall out. The average negative return across all three timeframes were -4%, -5%, and -7%, respectively.4
But the data below shows the positive returns were greater in magnitude—meaning the percentage upside was higher than the absolute value of the drawdown—following all-time highs. At the same time, the frequency of negative returns was low. In each subsequent timeframe, the percentage of periods with positive returns was more than 74%. The 6-month timeframe had the highest, with 85% of periods recording positive returns.
The chart above shows there is a positive skew to the return distribution after a market high, and the below chart reinforces those findings. It also captures the impact of the momentum effect on returns.
What does this US market behavior mean, if anything, for global stocks? Historically, using a rolling 30-day period covering our data set back to 1990, a US all-time high has only coincided with an all-time high for the MSCI EAFE Index (“EAFE”) and MSCI Emerging Markets Index (“EM”) just 27% and 9% of the time, respectively.5 This illustrates the divergence between the three regions that we’ve seen throughout the recent US bull market—neither EAFE nor EM has touched a new all-time high since 2007.6
But that doesn’t mean developed international stocks haven’t drafted off the US market’s positivity. As shown below, in prior US all-time highs, returns for the subsequent 3-month, 6-month, and 12-month periods for EAFE were 0.8%, 2.0%, and 3.3%, respectively. For EM, they were 0.4%, -0.7%, and -1.8%, respectively—a bit murkier than EAFE and with a downside skew.
Key takeaway: Hitting an all-time high means simply that stocks have gone up recently. Clearly, rallies can be knocked off course and drawdowns have occurred during the S&P 500 Index’s 104 all-time highs over the past three years. But, overall, the direction of travel historically has been higher up the mountain after an all-time high.
All-time high historical averages
To understand where we are, it is also prudent to examine where we have been. The below chart shows the average underlying dynamics of previous all-time highs vs. today’s levels. Compared to prior all-time highs, most of today’s underlying metrics lag historical averages. Only 72% of S&P 500 stocks are trading above their 200-day moving average today, compared with a historical average of 77% at prior highs. The same is true with 52-week highs. Only 4% of stocks are currently at 52-week highs, compared with the historical average of 13.2%. And only one sector (Technology) is also at an all-time high. Historically, we have seen an average of three sectors touching all-time highs in these circumstances.
These weaker-than-typical dynamics can be seen either as worrisome and an indication that we’re experiencing a fragile rally held up by a few stocks. Or, the data can be taken as evidence that there is more room for the market to climb before the air gets too thin and troubling. Adding credence to the former, not all US market segments have mirrored the S&P 500 Index on this ascent, as mid-caps (based on the S&P MidCap 400® Index) and small-caps (based on the Russell 2000 Index) were 4.6% and 9.6% off their all-time highs at the end of October.
However, having all three market cap segments sit at all-time highs may not be as exuberant of a market indicator as expected. In 30-day periods when all three market cap segments recently hit new all-time highs, the subsequent 6-month returns for the S&P 500 Index were, are on average, 2.4%, with 76% of the periods being positive. This compares to 85% when just the S&P 500 Index hit an all-time high7.
Key takeaway: Perhaps this data indicates the market’s current record-setting pace has more room to run given where the small-cap and mid-cap gauges reside, and that other market performance dynamics are sitting below average.
Is it getting harder for the market to breath at this elevation?
As for the notion of an all-time high equating to a stretched market, it is instructive to know that the price-to-earnings ratio for the S&P 500 Index currently sits just 8% above its 30-year median.8 However, that is just one metric. An ensemble of five valuation metrics (price-to-earnings, price-to-next-twelve-month-earnings ratio, price-to-book, price-to-sales, and enterprise value-to-EBITDA) currently plots in the 86th percentile over the past 30 years when aggregated together.9
What does this mean? Well, in months where prior all-time highs occurred, valuations were, on average, more constructive—plotting in the 63rd percentile. In fact, there have been only 20 occasions when the S&P 500 Index was at an all-time during a given month where the five-metric ensemble was higher than today’s level—15 of which occurred during the Dot-Com bubble. The others occurred right before the sharp sell-off at the start of 2018.
Key takeaway: Valuations are a concern. However, given that global monetary policy is loose and central bankers are showing a willingness to cut rates, the probability that the market will keep climbing is higher than the potential that it will retreat to base camp with a bear market-esque drawdown. In contrast, during the 2018 drawdowns, monetary policy was tightening.
The way to go up is not to go further down
Overall, if the market experiences a downfall from current heights, it will likely be a result from exogenous events such as the presidential impeachment inquiry, trade talks, Brexit, Middle-East tensions, or unrest in areas such as Hong Kong, Chile, and Argentina. During the market’s most recent ascent, drawdowns have been driven by an avalanche of uncertainty. Yet the trajectory overall, even with these macro risks, has been higher.
Investors shouldn’t fear the market’s current heights. But investors who want to maintain some form of sanity on this journey can consider equity strategies that seek to limit the impact of any “volatility drag” on returns while retaining upside participation potential.
1New all-time highs using price return levels for the S&P 500 Index, does not assume the reinvestment of dividends. Bloomberg Finance L.P. as of 10/31/2019, calculations by SPDR Americas Research. 1990 was used as the start date as the proceeding constituent moving average statistics started in 1990.
2"A ‘market melt-up’ is becoming a real risk as stocks hit new highs, Wall Street bull Ed Yardeni warns," CNBC, 11/03/2019.
3New all-time highs using price return levels for the S&P 500 Index, does not assume the reinvestment of dividends. Bloomberg Finance L.P., as of 10/31/2019, calculations by SPDR Americas Research. 1990 was used as the start date as the proceeding constituent moving average statistics started in 1990.
4New all-time highs using price return levels for the S&P 500 Index, does not assume the reinvestment of dividends. Bloomberg Finance L.P., as of 10/31/2019, calculations by SPDR Americas Research. 1990 was used as the start date as the proceeding constituent moving average statistics started in 1990.
5By using a 30-day period metric, it is meant to show conjoined all-time high periods as day-to-day comparison between all three indexes all-time highs can be volatile, as one can be at an all-time one day, but not the next day while the other index just hits a new high
6Bloomberg Finance L.P., as of 10/31/2019, based on price returns and do not assume the reinvestment of dividends. Calculations by SPDR Americas Research. Past performance is not a guarantee of future results.
7Bloomberg Finance L.P., as of 10/31/2019, based on price returns and do not assume the reinvestment of dividends. The 85% figure is when the S&P 500 Index is at an all-time high on any day, not just over a 30-day period. The 76% is when using the 30-day period metric to show conjoined all-time high periods as day-to-day comparison between all three indexes all-time highs can be volatile as one can be at an all-time one day, but not the next day while the other index just hits it. Calculations by SPDR Americas Research. Past performance is not a guarantee of future results.
8Bloomberg Finance L.P. as of 10/31/2019
9A Z-score was calculated for each metric with a final score representing the average of each Z-score.
EV divided by EBITDA or earnings before interest, taxes, depreciation, and amortization. EV (the numerator) is the company's enterprise value (EV) and is calculated as follows: EV = market capitalization + preferred shares + minority interest + debt - total cash
MSCI EAFE Index
An equities benchmark that captures large- and mid-cap representation across 22 developed market countries around the world, excluding the US and Canada.
MSCI Emerging Markets Index
The MSCI Emerging Markets Index captures large and mid-cap representation across 23 emerging markets countries. With 834 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
A valuation metric using the ratio of the company’s current stock price versus its earnings per share.
Price-to-Book Value Ratio
A valuation metric that compares a stock’s price to the company’s book value, which is calculated by its total assets minus intangible assets and liabilities.
A valuation metric using the ratio of the company’s current stock price versus its estimated earnings per share over the new twelve months per consensus analyst estimates.
A valuation metric that compares a stock’s price to the company’s revenue.
Russell 2000 Index
A benchmark that measures the performance of the small-cap segment of the US equity universe.
S&P MidCap 400 Index
A benchmark that measures the performance of the mid-cap segment of the equity universe.
S&P 500® Index
A popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.