Stock Market at All-Time Highs

Major US Stock market indices are hitting all time highs, which is making some investors nervous. Here’s a look at the S&P 500 Index below:

We do understand that continuing to invest in stocks during such times might make some investors nervous ─ because they believe the market is bound to correct or pull back some. They don’t want to be exposed to this potential risk. We get it.

But JP Morgan has produced some data and charts examining the consequences of buying stocks at all time highs. In the chart below, JP Morgan makes some compelling arguments that this risk is overblown, particularly in the long run.

In the graph of the market in the left panel of the JP Morgan slide above, the days with a closing high on the market are highlighted in green. In the right panel, the subsequent returns over future years associated with buying at the all-time high are compared to buying on all other days.

The following points are important:

  1. The market closes on all-time highs only 6.8% of all days.
  2. Those all-time high days serve as robust “floors” for the market level 30.4% of the time.
  3. Further, if these all-time highs are the purchase date as compared to all other days, the total return of the all-time high purchase days are higher than all other potential purchase days for periods of one year or longer.

Simply put, the fear of making new purchases at all-time highs might be misplaced.

At the same time, the present combination of high valuations and markets at all-time highs may just be too much for some investors to stomach. Because of this, they are thinking about potential ways to protect their portfolios from potential declines. But we caution that making a hasty decision to sell stocks and move to cash might be a very costly decision.

Last week we wrote about a new mechanism for protecting stocks from downside volatility while keeping the ability to still make some stock market gains via buffered ETFs. This may be appropriate for some investors based on their age, their retirement status, or their individual risk tolerance and desire to “sleep at night.”  Regardless of the impetus, these buffered ETFs can be a compelling alternative. They provide reasonable transparency and are also an excellent alternative because they can be bought and sold at any time during regular market hours (as compared to mutual funds that can only be traded at the close of each market session or the very illiquid structured notes that must be held for years to their maturity).

Even if investors believe a buffered ETF strategy might be right for them, care should be taken to fully understand the implications of this approach. Importantly, buffered ETFs will very likely produce a total return that is lower than an unhedged stock index investment over 10-20 years. Investors should understand they will give up some upside to gain downside protection. This can be thought of as the cost of “sleeping better.” And in a protracted market sell-off, buffered strategies will still lose some money, just not as muchg as the stock market. Moreover, buffered ETF positions need to be monitored AND actively managed to help ensure fully priced buffered ETFs aren’t held to the detriment of total return potential. All of these things should be carefully considered.

We do not have a crystal ball for future market returns. There is always some uncertainty when the stock market is involved. Many things MAY happen. The data provided by JP Morgan may provide the necessary perspective to keep you in the game. But if you are still looking to play some defense, a buffered ETF strategy might just be the right fit for you, and certainly a better option than cash. As the old saying goes, “cash doesn’t rally.” To learn more, please contact your WealthPlan advisor. We might be able to help you better navigate these all-time highs than going it alone.


DISCLOSURES

The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

The information in this communication applies solely to the intended audience and in no way amends, revokes, or otherwise alters the existing agreements and relationships between WPIM and its clients.  This communication is not a binding offer, expressed or implied.  WPIM undertakes no obligation to update or revise the information herein or in any referenced third-party resource due to new information, future events or circumstances, or otherwise.

WealthPlan Investment Management (“WPIM”) uses data compiled and/or prepared by third parties (“Third Party Data”) in the delivery of Licensed Research and Data. Third Party Data is not owned by WPIM and user may be required to obtain permission directly from third parties for further use of Third-Party Data and may be required to pay a fee depending on the use contemplated by the user.