The Market Hits All-Time High. So What?

With the US stock market repeatedly reaching all-time highs in recent weeks, many investors are becoming leery of investing in stocks. Focusing on the market's level is a mistake, in our view. It's market valuation, not level, that matters. 

Since 1900, the S&P 500  Index has been close to (within 5%) of its prior peak almost half the time. There’s a simple reason for this. The stock market goes up over time, along with the economy and corporate earnings. As a result, the market typically has regained its prior peak level fairly quickly after dropping. Then, it has resumed its upward march (Display 1).

The Market Is Often Near Prior Peaks Because It Rises

Fear of investing at market peaks is understandable. In the short term, there’s always the risk that other investors will decide to take gains, or that geopolitical, economic or company-specific news will trigger a market pullback.

But for longer-term investors, market level has no predictive power. Market valuation—not market level—is what historically has mattered to future returns  (Display 2).

Market Level Doesn't Matter; Market Valuation Does The green bars on the left side of Display 2 show average market returns after points at which the market level was close to its prior peak. The dotted line shows average market returns after all points since 1970 (we don’t have good valuation data before then).  Over 1-, 3-, 5- or 10-year periods, annualized returns were about the same after points at which the market was close to its prior peak level as after all points since 1970.

Display 2 also shows that buying when the market was at least 5% below its prior peak level (indicated by the blue bars) didn’t help much. It added slightly to annualized returns over 1- and 10-year periods, but detracted from returns over 3- and 5-year time periods.

By contrast, buying at high valuations detracted significantly from returns—and buying at low valuations added significantly. The green bars on the right side of Display 2 show annualized average market returns for 1-, 3-, 5- or 10-year periods after market valuations were expensive, based on price-to-trailing earnings; they’re far below the dotted line that indicates showing the average for each period since 1970. The blue bars show returns after points when market valuations were low; the returns for these periods were significantly above average.

What does all this mean for investors today? The S&P 500 may be at an all-time high level, but it’s far below its all-time high valuation. At 18.7 times trailing earnings, the US market today is more expensive than average but it's not extremely expensive (Display 3). Outside the US, however, equities haven’t rebounded as far, so the MSCI World Index  of developed-market equities remains close to its long-term average valuation.

US Stocks Are Somewhat Expensive vs. Earnings, But Very Cheap vs. Bonds But with interest rates still near historical lows, bonds are extremely expensive. Both US and global stocks are very attractively valued versus bonds, as shown by the earnings yield premium bars on the right side of Display 3.

While there's always the risk of a market correction, we think long-term investors should invest in stocks at close to their strategic allocations. And, as always, it’s wise to diversify globally.

The views expressed herein do not constitute research, investment advice, or trade recommendations, and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

Dianne F. Lob

Senior Managing Director—Equities
Dianne F. Lob was named Senior Managing Director for Equities and Head of Global Business Development in 2014. She focuses on the global sales strategy for AB’s broad equity platform, as well as new product development, thought leadership and the creation of marketing materials. In addition to coordinating globally with the Institutional, Retail and Private Client teams, Lob works closely with the head of equities on the business’s profit and loss statement. From 2010 to 2015, she was the President and a Director of the Sanford C. Bernstein Mutual Fund Board. From 2004 to 2014, Lob was chairman of Bernstein Global Wealth Management’s Private Client Investment Policy Group, responsible for asset allocation and investment strategies in the Private Client business. Prior to joining the firm in 1999 as a senior portfolio manager, she spent 22 years at J.P. Morgan, where she was a managing director and investment banker specializing in providing mergers and acquisitions advice and debt and equity financing for large-capitalization industrial companies. From 1991 to 1995, Lob was a senior member of the team that built J.P. Morgan’s equity business. Previously, she held various positions in international corporate finance, interest and currency swap marketing, lease advisory services, and media client banking. Lob holds a BA in economics from Tufts University and an MBA from the University of Chicago Graduate School of Business. She is on the board and is Head of the Endowment Committee of HIAS, a refugee rescue and resettlement organization. Location: New York

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