After more than a year of volatile ups and downs, the benchmark S&P 500 Index finally broke out to a new all-time high last week.
The S&P 500 closed at 2,137 on Monday, surpassing the previous closing high set in May 2015.
[ad#Google Adsense 336×280-IA]Why are new highs important? What has happened in the past after stocks have hit new all-time highs? And what should you do about it?
Today, I’ll answer these questions…
Let’s start with why new highs are important…
For most folks, a move to new highs shows that no matter what’s going on in the economy, “things can’t be all that bad.”
It puts them at ease.
Also, it’s a sign that the stock market is still a good place to invest.
To see if that has been true in the past, I looked at each time the S&P 500 broke out to a new all-time high after pausing (below its all-time high) for at least a year. Over the past 75 years, this happened only 13 times.
In the table below, you’ll see the average, minimum, maximum, and “median” returns for different time frames after a new all-time high. (If you were to arrange all of the individual returns from lowest to highest, the “median” is the one in the middle. It’s useful to consider alongside the average because it isn’t influenced by outliers or extreme individual results.)
If you compare the returns above with the returns for all periods (below), you see that it’s usually better to buy after new all-time highs than it is to buy at random. The average and median returns are better across all time frames.
What you can’t see is that after the S&P 500 hit a new all-time high (after at least a year without hitting one), the 12-month return was positive 12 out of 13 times. The only negative return – the 8.5% loss – came after a new high in May 2007.
In other words, in the same situation we’re in now, the historical returns were positive 92% of the time after one year. Those are good odds. And going forward, there’s a good chance we’ll see the stock market rise by another 13% over the next 12 months.
If you’ve kept all your cash out of the stock market, I suggest you start putting some money back into stocks today.
Don’t wait around on the sidelines any longer.
Good trading,
Ben Morris
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Source: Growth Stock Wire