
Why a Stock Peak Isn't a Cliff
2023 has started off well for stock investors, with the S&P 500 up about 18% through the end of July, not too far from its all time high reached in January 2022. If we approach that market peak, investors may question whether it's a good time to sell, or reduce their stock exposure. Of course, our advice is to think long-term, and not get caught up in debates about stock peaks vs. stock cliffs. A recent Dimensional study, shown below, confirms our thinking.
Many investors may think a market high is a signal stocks are overvalued. 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 those after months that ended at any level.
See Notes and Disclosures below.
• In looking at all monthly closing levels between 1926 and 2022 for the S&P 500 Index, 30% of them were new highs.
• After those highs, the annualized returns ranged from almost 14% one year later to more than 10% over the next five years, which were close to average returns over any period of the same length.
• Stocks are priced to deliver a positive expected return for investors, so reaching record highs regularly is the outcome one would expect.
David is the Co-Founder and Chief Investment Officer of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.