The following article appeared in yesterday’s Sunday Times, and I thought its timing was interesting, given that the market (as measured by the S&P 500 Index) is actually some 5.46% below its closing high in late March (The S&P 500 hit 5,254 on 28th March 2024 and at close of business on Friday it stood at 4,967). It’s a good article nonetheless, reminding us that just because the market is at, or close to a high, it can still go higher. In fact, I googled how often does the S&P 500 hit a new high and the answer is a staggering 17 times a year, on average or more than once in every 20 trading days. Remember though, that’s on average since the 1950s.
Here is the article by David Brenchley of Market Watch.
“Just like death and taxes, it is a certainty in life that when the stock markets hit an all-time high, the bears come out of hibernation. Stocks are in a bubble, they will say, the market is going to crash. Bears are pessimistic investors, the opposite of bulls. They will say that now is the time to sell our investments.
When the S&P 500, a stock market index of the biggest US companies, went into freefall in 2022, plunging 27.5 per cent, sceptics thought that it would take years to recover. But already this year it has hit an all-time high on more than 20 occasions.
The naysayers have been proved wrong so far, but they continue to insist that their predictions will play out eventually. Take the bearish investor Jeremy Grantham, the founder of the fund group GMO, who has predicted 12 of the last four stock market crashes, including the dotcom bust and the financial crisis. He thinks that crash number 13 is just round the corner. Actually, Grantham thinks that we’re still only halfway through 2022’s slump, which was “rudely interrupted by the launch of ChatGPT” last year. Artificial intelligence stocks are “a bubble within a bubble”, he reckons.
For those who aren’t up on the investment lingo, a bubble is when share prices within a certain stock index or theme soar in a short space of time, often with little in the way of business fundamentals to back them up. Other stock market gurus have voiced their concern, including the former US Treasury secretary Larry Summers, who thinks we are “at the foothills of a bubble”.
And it’s hard to argue against this when the likes of Nvidia, which makes the semiconductor chips that power generative AI, is up 203 per cent in the past year, and the Facebook owner Meta Platforms has risen 132 per cent. That kind of share price growth doesn’t happen often and should ring alarm bells.
I consolidated three old workplace pensions into a self-invested personal pension (Sipp) a year ago, giving myself more control over my retirement pot. Since then I have been cautious about investing the cash because markets have risen quickly. Memories of investing a lump sum inheritance into my stocks and shares Isa in mid-2021, only to see the value of those investments slump in 2022 are fresh. So, feeling rather burnt by bad decisions/timing/investments/all of the above, this time I am doing the opposite and slowly drip-feeding money into the market.
But perhaps I shouldn’t be so cautious. Just because the stock market is at an all-time high, it doesn’t mean that it’s about to crash. It could be that I was just unlucky three years ago. The thing about an all-time high is that it is only an all-time high until it is usurped by a higher one. In fact, you tend to make more money over the next 12 months if you invest when the market is at an all-time high than you do if you invest at any other time. That’s what the fund house Schroders found, anyway.
Historically, the average return a year after the US stock market has hit an all-time high is 10.3 per cent. That compares with a return of 8.6 per cent if you invest at all other times, according to Schroders data going back to 1926. Even more than three years after an all-time high, average returns were 7.6 per cent, versus 7.5 per cent at all other times.
If you had put $100 into the market 30 years ago and stayed invested throughout, you would have $864 today. If you had invested the same amount 30 years ago but sold your holdings and moved into cash each time the market finished a month at a record high (and gone back into stocks when it wasn’t at a record high), you would have $403 today — 53 per cent less. That’s encouraging.
“It is normal to feel nervous about investing when the stock market is at an all-time high, but giving in to that feeling would have been damaging for your wealth,” said Duncan Lamont from Schroders. “There may be valid reasons for you to dislike stocks, but the market being at an all-time high should not be one of them.”
What will eventually be the core of my portfolio are funds which invest in global companies such as the Vanguard FTSE Global All Cap, Vanguard LifeStrategy 100% Equity and Dimensional International Value funds. But instead of piling cash into these holdings, I have been focusing on other areas because global stocks look expensive.
I’ve been building up my positions in funds and investment trusts that focus on UK smaller companies, emerging markets and infrastructure, as well as those that back firms with positive environmental impacts. This means that while my core investments have performed well, up about 10 per cent, it’s only a small part of my portfolio — for now.
But I have begun to regret not topping up these core funds. I had been waiting for the S&P 500 to slip, which was what the bears convinced me would happen, before I start to put more meaningful amounts into those funds.
Nvidia’s price-to-earnings (PE) ratio, a popular stock valuation metric that divides a company’s share price by its earnings per share, is 73, according to the data firm Sharepad. The lower the PE ratio, the potentially cheaper the stock, and anything over 25 is generally seen as expensive. Yet, when you judge Nvidia on the earnings it is predicted to generate in three years’ time, its PE ratio falls to a much more palatable 24. Does this mean I have been sold a duff investment theory by the bears?
The counterpoint to my cautious approach is that my workplace pension, which is held with a different firm, has been automatically investing about a third of my monthly contributions into the SSGA International Equity Index fund, which has been benefiting from the markets’ rise.
Speaking of certainties in life, here’s another one: returns from the stock market always beat inflation if you invest for 20 years or more. Between 1926 and 2022, there was no 20-year period where US large-cap stocks didn’t outperform inflation, Schroders found. The takeaway of all this is that timing the market doesn’t really matter if you’re investing over the long term, which I am because I won’t be able to get at my Sipp for at least another 21 years — and let’s face it, probably more.
I should probably get a move on, forget about past mistakes and start putting my cash to work faster than I have been. Market highs be damned”.
I hope you found this interesting and, as always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
