All Time Highs Are Normal

We may have just witnessed the longest bull market in US market history. There is some disagreement on the definition of a bull market, but no matter how it is defined it is clear that the S&P 500 has been rising without too much interruption for a long time. When the market is rising, it tends to hit levels that have never before been seen.

Information like this makes a lot of people feel uncomfortable. What goes up must come down. I don’t want to invest at the top. It may be normal to feel this way, but it is probably not sensible. Fortunately, we have price data on the S&P 500 from Robert Shiller going back to 1871 to help us think sensibly.

Going back to 1871, and ending August 21, 2018, a dollar invested in the S&P 500 has hit an all time high in 16.3% of months; in other words, 289 of the 1,771 months going back to 1871 have seen all time highs. In hindsight we know that despite hitting all time highs the market has continued to rise. We also know that most of these all-time highs have been followed not by crashes, but by more all-time highs. Of the 289 all-time high months over the period, 194 of them were followed by another all time high. That’s 67% of the time.

Think about that. Investing in a month when the US market is hitting an all time high has historically been followed by another all time high 67% of the time. This strong post-all-time-high performance has not only been true for the US stock market. The MSCI EAFE and S&P/TSX Composite have shown similar results, with 63% and 66% of all-time highs being followed by another all-time high.

The green bars in the chart represent all-time highs.


Are markets expensive?

Hitting all-time highs may not be out of the ordinary, and they are probably not a reason to get nervous, but as prices rise faster than earnings, the Shiller PE also rises. As of August 22, 2018, the Shiller PE is sitting at 32.89, compared to a historical mean average of 16.56. Based on that it seems that the US market is expensive. Whether or not that is meaningful information is another story entirely.

A 2012 white paper from Vanguard showed that the Shiller PE does have some ability to predict future returns, but probably not enough to base any investment decisions on, especially short-term decisions. The paper found that the Shiller PE explains about 40% of the variance in future 10-year stock returns. More importantly for anyone feeling nervous based on current valuations, the paper found almost no explanatory power over 1-year stock returns. Put simply, even if the Shiller PE is high, that tells us almost nothing about the returns for the following 12 months. Stay invested.

The S&P 500 is not the world

If normalizing the S&P 500 hitting all-time highs and debunking a high PE as an indicator of a coming crash is not enough to calm the nerves, it is always important to remember that the S&P 500 is not representative of the world. While the US market has been soaring since March 2009, International and Canadian stocks have been much more restrained.

Total CAD Return March 2009 – July 2018

S&P 500 Index


S&P/TSX Composite Index


MSCI EAFE Index (net div.)         


Source: S&P Dow Jones Indices, MSCI, Dimensional Returns Web

A globally diversified investor has less to worry about in terms of an extended period of abnormally high returns. Even an investor who owns the total US market, or better yet a US market portfolio tilted toward small and value stocks, would have much less to worry about as those asset classes have not followed the S&P 500’s trajectory. That is, if all-time highs were anything to worry about, which they are not.

The MSCI EAFE hit an all-time high in January 2018, but has not surpassed that level since; it also finished its last bear market in early 2016. The S&P/TSX Composite index has reached all-time highs through 2018. While not quite a bear market, the Canadian market did see a drop of over 17% between 2014 and 2016.

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