Investing at all-time highs

The S&P 500 index reached another all-time high recently, leading many investors to question if now is really the best time to invest new money into the market.

Markets reaching all-time highs is not a signal for an imminent pull-back

Investors should not be alarmed by the fact some markets are reaching new-all-time highs. Long term investors will see numerous new market highs during their lifetimes. While some may be followed by a market correction, if we use history as a guide, many more will be followed by fresh highs.

New all-time highs by year, S&P 500 Index

While investor sentiment, elections and numerous other factors can influence markets in the short-term, over the long-term, economic growth, innovation, technology advancement, productivity improvements and ultimately a company’s ability to capitalise on these changes and grow earnings underpin the performance of a company’s share price, and markets.

The contrasting performance of the US and Japanese economies and markets over the last two decades is a testament to this.

From 2000 to pre-COVID, economic growth in Japan averaged a paltry 0.78% per annum. Over this period the Japanese market went sideways as the economy wrestled with deflation and stagnation.

In the US, economic growth, earnings growth and return on equity outstripped that of Japan and Japanese companies reflecting, among other things, more favourable demographics, an expanding workforce, productivity improvements and the use of technology. This saw the US market outperform the Japanese market three-fold over this period.

Thought of in this context, then markets reaching new highs are a positive. It is why we invest in companies and is why, historically, when markets have hit a new all-time high, they have tended to go on and record further new highs.

Admittedly, corrections in markets inevitably follow all-time highs as this is how drawdowns in markets are measured (from peak to trough), but if new highs in company share prices and markets are supported by positive company and economic fundamentals, then a continuation of this trend is warranted. However, we would caution that when markets get over-exuberant, a degree of selectivity is required.

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