Should investors worried about wars, tariffs, inflation and the Trump factor fear an equity market peak?
You have no doubt noticed that several markets have hit new all-time highs this past week. Hooray! Yes, despite multiple wars, tariffs, inflation concerns, Trump Tantrums and dozens of other things to worry about, markets just keep chugging along.
Many investors worry about new highs, thinking the end is nigh and this is a reason to sell equities. After all, they say, “Don’t new highs mean we are at a peak?” But we at 5i Research and i2i Capital worry less about them, and tend to see them as a confirmation of market strength rather than a cause of big new concerns. Sure, one can never get complacent about the market, at any time. But new highs in and of themselves we do not think are a reason to sell equities. Let’s look at a few reasons for this viewpoint.
Buying at new highs has historically worked out
Data show that investing at all-time highs has, on average, produced returns equal to or even better than investing at random times. For example, over the past 35 years, buying at new highs has worked out better on average than buying on any other day. One study by U.S. high-net-worth wealth manager Archbridge Family Office found that waiting for a 10 per cent pullback actually resulted in lower average one-year returns (7.1 per cent) than investing at the high (13.5 per cent). Waiting, of course, means you are not fully invested at all times and this can affect long-term returns.
New highs are actually really common
Using the artificial intelligence service Perplexity as well as Bloomberg LP data, we noted there have been about 1,700 new highs in the stock market since 1968. That equates to about eight per cent of the time, using the number of calendar days since then. The number is even higher, of course, if we only consider stock market trading days. When we look at very long-term investment returns we certainly would not want to be selling our stocks eight per cent of the time or more just because a new high was reached. New highs are to be more or less expected as a regular occurrence, and we would not specifically target selling because of them.
New highs result in higher investment confidence and FOMO investing
We all know that U.S. President Donald Trump looks at the stock market as a gauge of the economic health of the U.S. But investors consider these things as well. Considering all of the problems in the world right now it is astounding that investors are becoming more confident and looking forward rather than backward. New highs can go a long way in improving investor confidence, and confidence, generally, can imply more buying. Right now, there is about US$7 trillion in cash sitting in U.S. money market funds on the sidelines. As interest rates fall (maybe this year), these investors have to be looking at the strong returns in the market and be wondering why they are earning three per cent fully-taxed annual interest when the stock market is already up about five per cent in just the first half of the year. Confidence in the market could see some of this US$7 trillion work its way into the stock market over time, supporting more buying.
There is a correlated positive impact to companies’ cost of capital
Companies, of course, love it when their stocks hit all-time highs. A nice stock price allows companies to recruit new employees more easily and certainly allows them to retain employees more easily (up to a point; if a stock goes up too much then some employees get so rich they retire). A high stock price allows a company to make acquisitions using its stock as currency. A high stock price allows a lower cost of capital if a company sells shares for new growth initiatives.
Small- and mid-cap companies might finally see some bids
Small-cap stocks, after a decent rally was snubbed short by Trump’s “Liberation Day” tariff announcement, are still down about one per cent for the year so far, versus a gain of nearly five per cent for the Nasdaq. Small- and mid-cap companies historically do better over the long term but it is a market sector that needs confidence to really get going. If investors are setting new highs in the large-cap indices, then maybe, just maybe, this confidence will trickle down to the unloved (for now) small-cap sector. As markets rise, the valuation disconnect between large and small-cap stocks may be too big for some investors to ignore.
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