It’s been a tremendous start to the year for US markets. The S&P 500 index, which tracks the largest 500 companies in the US, is already up 5.3%.
Over the past 5 years, the S&P 500 has increased by almost 85%. That’s an annualized return of 13.1% in USD just for sitting in an index. Pretty impressive given what we have been through. Not great for the pessimists sitting in cash.
So, with the S&P 500 at all-time highs, is it a bad time to get in?
It may seem like a bad time. Ideally, you want to buy during a dip or a downturn.
Last year we saw plenty of dips. Remember the 15% drop in July 2023? That would have been an ideal time to get in. However, when it was happening, the financial media was blaring imminent recession and doom and gloom. I doubt many people actually bought that dip. Some likely even pulled money out of the markets (what a disaster)
In retrospect, buying the dip or during a market crisis always seems obvious. But having been through 2 market crashes and many, many dips of 20% or more, I can tell you it doesn’t seem so obvious at the time. This is when we need to really control our behavior and think rationally. Easier said than done.
Back to the question. Is now a bad time to get in? Markets are at all-time highs.
When it comes to questions like this, my go-to is always to use data to drive my decision-making. Historically, does the market reaching all-time highs automatically mean it’s a bad time to buy?
Let’s look at the data.
The table below shows the number of all-time highs for each calendar year that the S&P hit going back to 1929 (the year of the Great Depression).
[You can read the table as follows – if the market hits an all-time high today (like it did), then that counts as 1. If it goes higher tomorrow, that counts as 2.]
We have already had 7 all-time highs this year. Looking back, this is quite a low number (except for the periods of 0 all-time highs, of course).
The thing is, the market must hit an all-time high in order to hit the next all-time high (does that make sense?)
The stretches of 0 all-time highs have generally followed large market crashes. For example, the Dot Com bubble back in 2000 knocked the US market back about 40% within a year. It took another 6 years to get back to that same point.
I would point out that there is quite a big difference today from markets back in 2000. The big tech companies are hugely profitable with cash piles up to $100 billion.
For example, Meta’s share price popped 20% on their earnings call a couple of days ago when, among other things, their cash pile became so big they declared a dividend and a $50 billion share buy-back. Meta is up 35% this year alone (!).
Big tech is not short on cash and looks nothing like the 2000 bubble.
Big tech is not short on cash and looks nothing like the 2000 bubble.
The US economy is strong – inflation is coming down, unemployment is at all-time lows, and we should soon see the US repo rate coming down. US consumers are strong. What’s to say we don’t have another decade of all-time highs? Perhaps this decade will be known as the roaring 20s.
There’s enough pessimism out there and we know where that got those who invested accordingly. Perhaps we should be more optimistic.
