DeutschMany investors tend to see a record high in the stock market as a sign of overvaluation.
It’s easy to assume that after such a peak, the market could crash or at least deliver weaker returns. Surprisingly, however, historical data shows a completely different picture: Returns after a record high are, on average, just as strong as in months when the market did not reach new highs.
Record Highs – No Cause for Panic
A comprehensive analysis of the MSCI World Index, examining all monthly closing levels between 1970 and 2023, shows that 20% of these monthly closes represented new highs. In these cases, one might suspect that the market is “too high” and a correction is imminent. However, a look at the actual performance following these highs leads to a different conclusion.
The returns of the MSCI World Index after a record high ranged from just under 8% one year later to over 7% per year over the following five years. These numbers are very close to the average returns of the index over the same periods, regardless of whether a new high was reached or not. In other words, record highs have historically had no negative impact on future performance.
The Market Prices in Future Expectations
One of the key takeaways from this data is that stock markets operate in a way where positive returns are the norm in the long term, not the exception. Record highs are therefore a natural part of this process. Stock prices reflect the expectations of market participants regarding the future growth and earnings of companies. As long as these expectations remain positive, it is likely that stocks will continue to rise and set new records.
However, this does not mean that there won’t be setbacks or market corrections. Price fluctuations and corrections are also part of the nature of the stock market. But when viewed in the long term, stocks tend to increase in value, which is reflected in regular record highs.
Controlling Emotions and Staying Rational
A common problem many investors face is the emotional reaction to record highs. It’s easy to let the fear of a market correction take control when new peaks are reached. However, the data shows that this fear is often unfounded. Instead of panicking and possibly reacting inappropriately, investors should take a long-term view of the market and focus on their fundamental investment strategy.
It is advisable not to be influenced by short-term market developments but to adopt a long-term perspective. Those who invest regularly in the market and diversify their investments broadly can benefit from long-term growth opportunities—regardless of whether the market is currently reaching a record high or not.
Conclusion
A record high in the stock market should not be seen as a warning signal of an impending overvaluation or crash. Historical data shows that returns after a peak are usually just as high as during other market phases. Record highs are a natural part of market growth and reflect investors’ long-term positive expectations.
Therefore, investors should not be driven by emotions but rather trust in a solid, long-term investment strategy. Because regardless of new highs, the principle remains the same: those who invest broadly and give the market time benefit from positive developments in the long run. Record highs are therefore not a cause for concern but rather a sign that the market is working as expected.