All-Time Highs Are Both Scary & Normal
A common question from clients these days is “How comfortable are you investing now given the markets (and your portfolio stocks) are at all-time highs?”. Our simple answer is that our portfolio earnings are also at all-time highs. Indeed, for the fiscal year to date, our portfolio is up a little over 20% whilst its weighted average earnings are up 46% yoy for H1 FY2020. This is of course driven by the tax rate cuts announced by the government but the benefits of those tax cuts do accrue to shareholders and should get reflected in stock prices. In this piece, Ben Carlson reinforces the fact that in general equities in the long run are upward trending (giving profits tend to grow) and hence all-time highs are completely normal. Ofcourse, he does caution that eventually one of these all-time highs will form a short/medium term top and hence may suggest moderation of future returns.
“So on the one hand, don’t be afraid of all-time highs. If you plan on being in the stock market over the long-term, you’re going to have to get used to the fact that stocks mostly go up over time and new highs are completely normal. In fact, following an all-time high, stocks are up roughly 70% of the time going out one, three and five years into the future.
On the other hand, the reason 1 out of every 20 days has been a new all-time high historically is because you can’t set your watch to it. Eventually, one of these highs will be the top. Just know that there are so many highs in the market that it’s impossible to predict with any degree of certainty which one that will be.”