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By Brian Levitt, Global Market Strategist
The S&P 500 Index hit a new record.1 We did it! And also… what do we do now? Here’s what stock market highs mean – and don’t mean – for long-term investors.
A world of change since the last market high
Admittedly, the prior peak in January 2022 wasn’t that long ago in terms of days, but a lot happened over that time period: US inflation climbed to 9%2, the Federal Reserve raised interest rates by over 500 basis points3, Russia invaded Ukraine, and a new Middle East conflict emerged.
(Taylor Swift’s record-setting album Midnights hadn’t even been released yet.) Prominent naysayers warned of “economic hurricanes,” “five years of unemployment above 5%,” and “the worst earnings recession since 2008.” Not surprisingly, Americans’ confidence in the economy eroded.4
Fast-forward two years. Thanks to a resilient economy, quickly fading inflation, and a 26% advance in 2023, we’re now celebrating the S&P 500 Index hitting a new record above 4797.5
Some investors might view this with trepidation. After all, aren’t we still waiting for the lagged effects of historic policy tightening to hit the economy? That’s true, but markets lead the economy, not vice versa. In my view, it’s likely that the 25.4% peak-to-trough decline in the S&P 500 Index in 2022 was accounting for the looming economic slowdown.6
A 25% decline is in line with the market’s performance ahead of past mild economic slowdowns/modest recessions.
In those garden-variety economic downturns, markets historically bottomed around the time inflation had peaked and returned to prior highs within a year or two.7 Sound familiar?
What does a new market high mean? Three things to know.
More importantly, a new market high is not in itself any kind of danger sign – despite what some may fear. As the author Sir Arthur C. Clarke said, “Only small minds are impressed by large numbers.” Here are three points to help put those large numbers into perspective:
- Stock market averages are not mean reverting. In other words, they don’t return to a long-term average. Rather, they represent growth expectations for the US and the world. If you believe that conditions in the world will continue to get better for most people and that innovative businesses will continue to thrive, then you should expect markets to trend upward over long periods.
- New highs offer very little information in and of themselves. It is far more interesting to compare the price of an index to the fundamental characteristics (earnings, sales, book value) of the companies in that index. While the broad S&P 500 Index may currently be trading at extended valuations compared to its own history, much of it is concentrated in the top 10 names. The other 490 stocks have been trading at average valuations.8
- Finally, the S&P 500 Index has hit 1,176 new highs since its 1957 inception.9 That’s the equivalent of a new high every fortnight, or 14.3 days. History suggests that investors should expect the market to ascend to many new highs over their lifetimes, even if the path isn’t always a straight one.
Footnotes
1 Source: Bloomberg, 1/19/24.
2 Source: US Bureau of Labor Statistics, 11/30/23. As represented by the yearly percent change in the US Consumer Price Index.
3 Source: US Federal Reserve, 12/31/23. As represented by the federal funds rate.
4 Source: Gallup, 9/30/23. As represented by the Gallup Economic Confidence Index.
5 Source: Bloomberg, 1/19/24.
6 Source: Bloomberg, 12/31/23. As represented by the S&P 500 Index, which fell 25.4% from the peak on 1/3/22 to the trough on 10/13/22.
7 Source: Bloomberg L.P., 6/30/23. Based on recession dates defined by the National Bureau of Economic Research: Aug. 1957 – Apr. 1958, Apr. 1960 – Feb. 1961, Dec. 1969 – Nov. 1970, Nov. 1973 – Mar. 1975, Jan. 1980 – Jul. 1980, Jul. 1981 – Nov. 1982, Jul. 1990 – Mar. 1991, Mar. 2001 – Nov. 2001, Dec. 2007 – Jun. 2009 and Feb. 2020 – Apr. 2020.
8 Sources: Bloomberg, Invesco, 12/31/23. Top ten holdings as of 11/30/23 are Microsoft, Apple, Amazon, NVIDIA, Alphabet, Meta, Tesla, Berkshire Hathaway, UnitedHealth Group, and JP Morgan Chase.
9 Source: Bloomberg, 1/19/24.
Important information
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Header image: Pavel Kašák / Adobe Stock
Investors should consult a financial professional before making any investment decisions. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
The US Consumer Price Index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics. Core CPI excludes food and energy prices while headline CPI includes them.
The S&P 500® Index is a market-capitalization-weighted index of the 500 largest domestic US stocks. The S&P 500 Total Return Index assumes that all cash distributions are reinvested.
Gallup’s Economic Confidence Index is based on the combined responses to two questions, the first asking Americans to rate economic conditions in this country today, and second, whether they think economic conditions in the country as a whole are getting better or getting worse.
A basis point is one hundredth of a percentage point.
Tightening monetary policy includes actions by a central bank to curb inflation.
The federal funds rate is the rate at which banks lend balances to each other overnight.
The opinions referenced above are those of the author as of Jan. 19, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
3 Things To Know About The Stock Market’s New Record High by Invesco US
