SUMMARY
Investors often fear buying or holding when markets are up strongly and are near all-time highs. Historically, though, subsequent returns have been decent.
KEY TAKEAWAYS
Equities have rallied strongly from their late-2022 bear market lows
Some investors are reluctant to invest or stay invested around all-time highs
History suggests such times have often been good times to be invested, though
Bear markets are an inherent hazard of investing, but equities have often regained former highs before too long
Getting out while the going is still good can be a useful habit in life.
In professional careers, entrepreneurial ventures, and even at social events, there is often a case for making an exit before the fun stops.
No wonder, then, that some people bring this mindset to their core investment portfolios.
Indeed, we’ve heard some clients ponder recently whether now might be a favorable moment to “take some money off the table.”
After all, US large-cap equities, as measured by the S&P 500 Index, is up 34.9% from its lows of October 2022.1
And stocks from the rest of the world – as measured by the MSCI World AC ex-USA Index – have risen 18.5% since then.2
Both indices have been at or close to record highs at various moments in 2024, even after the August swoon in risk assets.
Fuel for fears
At the same time, it’s not hard to find things to worry about. Take November’s US elections, for example, which are already shaping up to be some of the most controversial in memory.
Just as uncertain as many countries’ internal politics right now are international relations.
This year alone, the world has witnessed an alarming exchange of missiles between Iran and Israel, a further deterioration in the relationship between North and South Korea, and Russian breakthroughs in its war with Ukraine.
And there’s no shortage of potential flashpoints, as Steven Wieting set out in our Wealth Outlook 2024: Mid-Year Edition.
In some investors’ minds, this mix of equity prices at highs and unpredictable geopolitics adds up to a reason for switching at least part of their portfolios from risk assets to cash.
The aim would be to dodge any downtrend that could potentially strike after some unpredictable flareup.
Why uptrends and record highs are a good thing
Let’s take a closer look at the logic here.
First, do strong recent gains in equities mean there’s a greater risk of declines before long?
To some investors, buying after a strong rally seems counterintuitive.
This reflects an assumption that “what goes up, must come down.” History has a rather different message, though.
We’ve looked back at episodes going back to 1970 where the S&P 500 rallied 20% or more within a 180-calendar day period.
Following such uptrends, the average return over the following year was 9.7% - figure 1.3
What about investing at all-time highs?
In the popular imagination, this must be a bad idea. All-time highs are where some of the most savage bear markets have begun. Think 1987, 2000 or 2007, for example.
Once again, though, this notion doesn’t stand up to scrutiny.
Going back to 1970, we’ve found that the average one-year return after an all-time high was 9.3%.4
At Citi Wealth, we are skeptical of the case for market timing – switching between risk assets and cash – in any event.
But our analysis suggests that the periods following strong gains in a market would typically have seen market timing attempts do especially poorly.
Figure 1. All-time highs have only sometimes been market tops
Source: Citi Wealth Investment Lab, Bloomberg. Data: Dec ‘69 – Jun ’24. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Investing in an unstable environment
Geopolitical risk is often in the headlines these days.
Rolling 24-hour news coverage featuring hostile rhetoric, drone strikes, and detailed speculation about “what else could go wrong?” can easily affect people’s thinking.
And it is true that geopolitical flashpoints can trigger negative consequences far beyond the country or region where they occur.
Russia’s invasion of Ukraine, for example, caused a major upheaval in global food and energy supplies.
In financial markets, such events create waves too. But while they have often triggered some initial volatility, the turmoil has often been short-lived.
Once again, we find that developed market equities – as measured by the MSCI World Index – have delivered a positive one-year return later in five of the six geopolitical events we have analyzed – figure 2.
Figure 2. Selected geopolitical shocks have unsettled the MSCI World Index initially but then faded
Source: Citi Wealth Investment Lab, Bloomberg. Data is MSCI World Index from 31 Dec 1969 to 30 Jun 2024. Chart shows historical average MSCI World Index returns six months ahead of and then 12 months after select major political events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Of course, this hasn’t always been true. The exception in the last 55 years was the Oil Embargo of 1973.
Following that shock, developed equities suffered major downside.
Do investors vote with their feet because of election jitters?
Ahead of November’s hotly contested presidential election, the experience of prior US presidential elections is also worth studying.
History tells us that volatility has often accompanied the runup to polling, especially during those campaigns that ultimately resulted in a new president from the opposite party.
Figure 3. The S&P 500 has risen on average in the year after elections
Source: Citi Wealth Investment Lab, Bloomberg. Data is S&P 500 Index from 31 Dec 1969 to Jun 2024. Chart shows historical average S&P 500 Index returns in the six months before and year following US presidential elections, with the dashed vertical lines marking the timing of the election. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
On average, markets have also preferred victories by the incumbent, with stronger average post-election rallies in such cases.
Overall, though, US equities have historically been positive one year following polling day, no matter which party prevailed.
Staying the course
Given equities’ past tendency to trend upward over time – and their resilience in the face of geopolitical traumas – our stance is clear: staying fully invested is the way to go.
The alternative of market timing typically sees investors holding large amounts of cash often for extended periods.
For suitable investors who can bear some volatility, being out of the markets may entail missing out on rallies as well as foregoing dividend payments and the effect of compound returns.
Over the long term, the returns on cash after inflation have been nowhere near those on equities – figure 4.
Figure 4. US equities’ real return has far exceed that on cash
Source: Citi Wealth Investment Lab, Bloomberg. Data is S&P 500 Index from 31 Dec 1969 to 30 Apr 2024. Real returns are returns adjusted for inflation. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Naturally, big drawdowns – peak-to-trough declines – are an occasional fact of life for some investors.
Figure 5. The MSCI World Index has generally regained former highs fairly soon
Source: Citi Wealth Investment Lab, Bloomberg. Data is MSCI World Index from 31 Dec 1969 to 30 Jun 2024. Chart shows how many months the MSCI World Index has taken on average to recover following drawdowns of various degrees. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Such episodes are hard to predict, despite best efforts of market timers.
We note, though, that developed equities have often bounced back soon after many of the dips that have occurred throughout time.
After bear markets of between 20% and 40%, the MSCI World Index have regained their previous highs an average of 14.2 months after their lows.
Major bear markets – which we define as 40% or more – were a little different. On average after these rare events, recovery to previous highs took most of five years.
Nonetheless, we believe the lessons of history favor staying the course - or forming a fully invested core portfolio for those investors currently on the sidelines.
