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Equity all-time highs are meaningless
Equity all-time highs are meaningless. Today the Dow Jones and S&P 500 have both hit all-time historical highs, but we believe its a meaningless milestone, with the headlines only likely to feed further positive momentum.
Looking historically the Dow Jones Industrial index has regularly made new “all-time highs”, since the 1950s there have been 1161 all-time highs and so far this year there have been 7.
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Looking at all trading days since the beginning of 1950, a total of 6.7% of all trading days represent new all-time highs. In fact, if we were to interpret the data correctly it seems this we are achieving less all-time highs this decade than ever before, despite QE (quantitative easing) ramping up equity valuations.
The pattern of all-time highs really reflect periods after economic malaise, typically during these weaker points we see drought periods where no new all-time highs are achieved. For instance, from 2007 to 2013 there were 1973 days where no new all-time highs were achieved, then after this period we saw a whole flurry of them.
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In terms of the real experience for the investor, total return (including dividends) must be taken into consideration too. After the all-time highs achieved in 2007 in simple price terms investors had to wait until 2013 to achieve a new all-time high, but in total return terms this was 2 years earlier.
Equities, unlike bonds, are to some extent a real asset as companies tend to pass on rising costs to their consumers rather than allow margins to be squeezed, and therefore do tend to continue to rise over time.
Aside from being a psychological level, all-time highs are a bit like Denis Quaid’s view on golf, its meaningless but it means so much.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
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