The Market Has Reached All Time Highs; Now What? – Spring 2013

For quite a few years now, faith in the markets has been sorely tested. After severe bear markets, confidence in the market’s ability to recover is often lacking.   Now for the first time in many years, we have the opposite problem: The markets have recently hit all-time highs: Aren’t we at a “top” now? Shouldn’t we expect a drop in the market?

A recent analysis from DFA’s research group explores that exact question.  They pulled the daily closing S&P 500 index levels, (start date: 7/2/1962), and looked at what has occurred subsequent to each time the index level has reached a new all-time high.

The findings are summarized in the table below. After each new high, they looked ahead in the data at horizons of 1, 3, 6, and 12 months out and tabulated the percentage of the time that the index level was at or above the level it had reached when it had set the new high.

S&P 500 from 7/2/1962 and including previous monthly high set in 12/1961:

sp highs

One year after the market has set new all time highs, the market has been even higher 72.6% of the time. This is similar to the percentage of up years in any environment. So the question again – “Does hitting a new high tell me something about where the market will be at some point in the near future”? These numbers would indicate it doesn’t.

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