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Blog

Why a Stock Peak Isn't a Cliff

Ginnie Baker
January 21, 2022

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 2021 for the S&P 500 Index, 30% of the monthly observations were new highs.
After those highs, the average annualized compound returns ranged from over 14% one year later to more than 10% over the next five years. 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.

Disclosures

Adapted from Why a Stock Peak Isn’t a Cliff by Dimensional Fund Advisors. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In US dollars. For illustrative purposes only. New market highs are defined as months ending with the market above all previous levels for the sample period. Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market highs observations. There were 1,151 observation months in the sample. January 1926–December 1989: S&P 500 Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. January 1990–Present: S&P 500 Index (Total Return), S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

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