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The S&P 500 Index hit a new record.1 We did it! And also…what do we do now? Here’s what stock market highs mean – and don’t mean – for long-term investors.
Admittedly, the prior peak in January 2022 wasn’t that long ago in terms of days, but a lot happened over that time period: U.S. inflation climbed to 9%,2 the Federal Reserve raised interest rates by over 500 basis points,3 Russia invaded Ukraine, and a new Middle East conflict emerged. (Taylor Swift’s record-setting album Midnights hadn’t even been released yet.) Prominent naysayers warned of “economic hurricanes,” “five years of unemployment above 5%,” and “the worst earnings recession since 2008.” Not surprisingly, Americans’ confidence in the economy eroded.4
Fast forward two years. Thanks to a resilient economy, quickly fading inflation, and a 26% advance in 2023, we’re now celebrating the S&P 500 Index hitting a new record above 4797.5
Some investors might view this with trepidation. After all, aren’t we still waiting for the lagged effects of historic policy tightening to hit the economy? That’s true, but markets lead the economy, not vice versa.
In my view, it’s likely that the 25.4% peak-to-trough decline in the S&P 500 Index in 2022 was accounting for the looming economic slowdown.6 A 25% decline is in line with the market’s performance ahead of past mild economic slowdowns/modest recessions. In those garden-variety economic downturns, markets historically bottomed around the time inflation had peaked and returned to prior highs within a year or two.7 Sound familiar?
More importantly, a new market high is not in itself any kind of danger sign – despite what some may fear. As the author Sir Arthur C. Clarke said, “Only small minds are impressed by large numbers.” Here are three points to help put those large numbers into perspective:
1. Stock market averages are not mean reverting. In other words, they don’t return to a long-term average. Rather, they represent growth expectations for the U.S. and the world. If you believe that conditions in the world will continue to get better for most people and that innovative businesses will continue to thrive, then you should expect markets to trend upward over long periods.
2. New highs offer very little information in and of themselves. It is far more interesting to compare the price of an index to the fundamental characteristics (earnings, sales, book value) of the companies in that index. While the broad S&P 500 Index may currently be trading at extended valuations compared to its own history, much of it is concentrated in the top 10 names. The other 490 stocks have been trading at average valuations.8
3. Finally, the S&P 500 Index has hit 1,176 new highs since its 1957 inception.9 That’s the equivalent of a new high every fortnight, or 14.3 days. History suggests that investors should expect the market to ascend to many new highs over their lifetimes, even if the path isn’t always a straight one.
Brian Levitt is Global Market Strategist at Invesco and cohost of Invesco’s “Market Conversations” podcast.
Notes
1. Source: Bloomberg, 1/19/24.
2. Source: US Bureau of Labor Statistics, 11/30/23. As represented by the yearly percent change in the US Consumer Price Index.
3. Source: US Federal Reserve, 12/31/23. As represented by the federal funds rate.
4. Source: Gallup, 9/30/23. As represented by the Gallup Economic Confidence Index.
5. Source: Bloomberg, 1/19/24.
6. Source: Bloomberg, 12/31/23. As represented by the S&P 500 Index, which fell 25.4% from the peak on 1/3/22 to the trough on 10/13/22.
7. Source: Bloomberg L.P., 6/30/23. Based on recession dates defined by the National Bureau of Economic Research: Aug. 1957 – Apr. 1958, Apr. 1960 – Feb. 1961, Dec. 1969 – Nov. 1970, Nov. 1973 – Mar. 1975, Jan. 1980 – Jul. 1980, Jul. 1981 – Nov. 1982, Jul. 1990 – Mar. 1991, Mar. 2001 – Nov. 2001, Dec. 2007 – Jun. 2009 and Feb. 2020 – Apr. 2020.
8. Sources: Bloomberg, Invesco, 12/31/23. Top ten holdings as of 11/30/23 are Microsoft, Apple, Amazon, NVIDIA, Alphabet, Meta, Tesla, Berkshire Hathaway, UnitedHealth Group, and JP Morgan Chase.
9. Source: Bloomberg, 1/19/24.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of January 19, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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