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Why a Stock Peak Isn't a Cliff Thumbnail

Why a Stock Peak Isn't a Cliff

2024 has started off well for stock investors, with the S&P 500 crossing 5,000 during February, and trading near it's all-time high. At every market peak investors may question whether it's a good time to "take some chips off the table". 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 Rappaport, CFP®
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.

Notes and Disclosures:
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 1,163 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 © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.