Recent strong performance isn't necessarily a sign that markets are peaking.
Fidelity Wealth Management
Key takeaways
- Recent all-time highs may be a sign of strength.
- Timing the market is difficult, if not impossible.
- Investing at a regular cadence and staying invested may be worth considering.
In the first quarter of 2024, the S&P 500® index rose more than 10% and reached a new all-time high 22 times.1 This strong start to the year has been a welcome sign of resilience, especially after a much-worried-about recession failed to materialize in 2023. Still, though we've managed so far to avoid a recession and seem to be enjoying a boom in stocks, some investors can't shake the feeling that something bad might be just around the corner. Are those all-time highs a sign that the market is peaking and that a decline is on the horizon?
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All-time highs may be a sign of strength
What goes up must come down, or so says the old cliche. But strong market performance, like what we've been experiencing recently, is not in and of itself a harbinger of doom. Historically, all-time highs have not been followed by significant selloffs. In fact, stocks have experienced better than average returns after reaching an all-time high. "New all-time highs have typically led to further all-time highs," says Naveen Malwal, institutional portfolio manager with Strategic Advisers LLC. "That’s because generally, stocks have made new all-time highs when the economy and earnings were supportive for good growth. And those trends have often lasted a long time."
Since 1950, in the year following an all-time high, average total returns for the S&P 500 index were 12.7%, compared to 12.4% for other 12-month periods. If you look back at each time the S&P 500 reached an all-time high, you can see that the market often pushed even higher, reaching new all-time highs thereafter. If an investor took an all-time high as a sign that it's time to get out of the market or to shift to a more conservative asset allocation, they would have likely missed out on further significant gains in the stock market.
Stocks represented by S&P 500® index total returns from 1950–2023. Past performance is no guarantee of future results. Source: Fidelity, Strategic Advisers LLC, Bloomberg Finance, L.P., from 12/31/1949 to 3/31/2024, daily data. US stocks are represented by the S&P 500® index. It is not possible to invest directly in an index. All indexes are unmanaged. Average 1-year total return was 12.4% over this time period. Source: Fidelity Investments Strategic Advisers LLC.
Getting out can cost you
Investors who retreat from the market out of concern for future performance may end up inadvertently reducing the long-term value of their portfolio. That's because just a few good days can make up for a slew of bad ones. And if you're not invested, you're more likely to miss out.
If you consider a hypothetical $10,000 portfolio that tracks daily total stock returns from 1980 through 2022, you can see the impact this could potentially have. An investor who stayed in the market throughout that time period would have ended up with a portfolio valued at just over $1 million. However, missing just the 5 best days in the market during that period would have reduced the portfolio's value by as much as 38%. Missing the best 50 days over that 42-year period would've reduced the portfolio's value to just over $76,000.
Stock returns represented by the S&P 500® index from January 1,1980–December 31, 2022. Past performance is not a guarantee of future results. Source: Fidelity, Asset Allocation Research Team, Bloomberg as of 12/31/22. Updated analysis will be forthcoming in the second quarter of 2024. The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. “Best days” were determined by using the one-day total returns for the S&P 500®Index within this time period and ranking them from highest to lowest. There is volatility in the market and a sale at any point in time could result in a gain or loss. Your own investment experience will differ, including the possibility of losing money. It is not possible to invest directly in an index. All indexes are unmanaged.
You can't predict what days will be good and what days will be bad—and trying to do so may lead you to make a big mistake, one that could be hard to recover from.
Waiting to invest may not be wise, either
Perhaps you're watching the market hitting these all-time highs and thinking, "I don't want to buy at the top, I'll wait until things cool down." The data shows, however, that this may not be a wise decision. Timing the market is notoriously difficult, if not impossible.
“I have never seen a reliable way of knowing the absolute best time to buy and sell the market day to day," says Malwal. Even if you did have a perfect way to time the market each year, the benefits of doing so would be relatively modest. The risk of choosing the worst time to invest, however, could be substantial—you may end up well behind where you would have been if you had simply invested consistently at the start of every calendar year or every month.
Best timing scenario is defined as investing $5,000 at a market bottom each year. Worst timing scenario is defined as investing $5,000 at a market top each year. The start of every year is defined as investing $5,000 in January of each year. Monthly figures reflect investing about $417/month. Cash figures reflect holding a cash-only portfolio.Past performance is no guarantee of future results. Source: Fidelity, Strategic Advisers LLC, Bloomberg Finance, L.P., from 12/31/1979 to 12/31/2023. Stocks—S&P 500® Index. Cash—generic US. It is not possible to invest directly in an index. All indexes are unmanaged. 3M Treasury yield.
In essence, when you take money out of the market, you're more likely to miss out on one of the few good days necessary to realize strong performance over the long term. "Since predicting markets may be impossible, I believe that an investor may have more success in getting closer to their financial goal by staying invested," says Malwal.
Stay focused on the long term
It may seem like there's always something to worry about. Whether it's disruptive geopolitical events, the prospect of a recession, or an upcoming election, a good way to weather the storm is to have a solid, well-thought-out plan that is attuned to your goals, your tolerance for risk, and your time horizon. By sticking to your plan, you can potentially avoid the pitfalls that present themselves when you feel challenged by short-term volatility. Market corrections (that is, when markets drop more than 10%) are a normal part of investing.
"While there probably will be a correction at some point, we can't know exactly when. Nor can we know how deep or how long it will last. That's how markets work," Malwal says. "Part of investing is accepting that when you invest in a mix of stocks and bonds, there are going to be ups and downs. But historically, the overall direction of the S&P 500 has been upwards for nearly 100 years."2
Malwal points to positive economic data, such as low unemployment, wage growth, and corporate earnings, as evidence that we are unlikely to be on the cusp of a recession. "The outlook for corporate earnings is good, not just for 2024 but for 2025 as well, which is encouraging," says Malwal.3 " Those earnings forecasts may suggest that many professional stock analysts believe that the market could continue to grow for several quarters more, maybe even through next year and beyond."
