The Truth About Investing at All-Time Highs — Transcript

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1. 0:00The Canadian and US stock markets have
2. 0:02reached new all-time highs in 2026. If
3. 0:04you're like lots of investors, you might
4. 0:06get nervous about all-time highs. It
5. 0:08feels like too much good news has to be
6. 0:11followed by bad news. This is a
7. 0:13cognitive bias called the gambler's
8. 0:15fallacy, the belief that the probability
9. 0:17of a random event like tomorrow's stock
10. 0:19market returns is influenced by
11. 0:21yesterday's stock market returns.
12. 0:23There's a bit of nuance to this, but
13. 0:25generally speaking, stock returns are
14. 0:27pretty close to random. Lots of positive
15. 0:29stock returns leading to an all-time
16. 0:31high in the stock market doesn't really
17. 0:33tell us much about future stock market
18. 0:35returns. I'm Ben Felix, Chief Investment
19. 0:38Officer at PWL Capital, and in this
20. 0:39video, I'm going to tell you why
21. 0:41all-time highs in the stock market are
22. 0:43nothing to fear, at least most of the
23. 0:45time.
24. 0:50I'm going to start by talking about
25. 0:51all-time highs in the level of stock
26. 0:53market indices, which I'll also explain.
27. 0:56But, stick around for the second half of
28. 0:57the video where I'll talk about market
29. 0:59valuations, which is a different
30. 1:01concept. At the time of recording, the
31. 1:03US stock market has a cyclically
32. 1:04adjusted price earnings ratio, which is
33. 1:07a measure of market valuation, how
34. 1:08expensive it is to buy the future
35. 1:10earnings of companies, close to the
36. 1:12level that preceded the dot-com bust.
37. 1:15Let me start by explaining what an
38. 1:16all-time high in the stock market even
39. 1:18means. Stock market indices like the S&P
40. 1:20500 for US large-cap stocks or the S&P
41. 1:23TSX Composite for Canadian stocks are
42. 1:26groups of stocks weighted by the market
43. 1:28value of the companies that are included
44. 1:29in the index. They're designed to
45. 1:31represent a stock market or a part of a
46. 1:33stock market. To track an index's
47. 1:35performance over time, each index has a
48. 1:38base level. For example, the S&P 500
49. 1:40index has a base level of 10 starting in
50. 1:431941-43.
51. 1:45Each day, the index's return is
52. 1:47calculated based on the performance of
53. 1:48the stocks in the index, and then a new
54. 1:51index level is recorded. Over time, that
55. 1:53number gets bigger when returns are
56. 1:55positive and smaller when they're
57. 1:57negative. Today, the level of the S&P
58. 1:59500 is over 7,000. Each time the level
59. 2:02of a major index surpasses its previous
60. 2:04all-time high, the media tends to report
61. 2:06on it. The funny thing though is that
62. 2:08the level of the index is kind of
63. 2:10meaningless. There are few issues. One
64. 2:12is that index levels are typically
65. 2:13calculated based on stock prices only,
66. 2:16not dividends. They're price only
67. 2:19indices rather than total return
68. 2:20indices. We would actually see more
69. 2:22all-time highs if dividends were
70. 2:24included in the index level calculations
71. 2:27that are commonly reported on. Academic
72. 2:29research on this shows that the price
73. 2:30only presentation of index data affects
74. 2:33how people think about the stock market.
75. 2:34For example, for a given level of
76. 2:37returns, newspaper coverage is more
77. 2:39negative when dividends are higher
78. 2:41because the price drops when a dividend
79. 2:44is paid. But economically, it's not a
80. 2:46bad thing because you received the
81. 2:48dividend. The price went down, but you
82. 2:50received the dividend. It's kind of a
83. 2:51weird quirk, but it just shows how
84. 2:53meaningless the all-time highs that get
85. 2:55reported in the media can be. Same with
86. 2:57drops in the level of the index. Another
87. 2:59issue is inflation. Index levels are
88. 3:01nominal figures, so inflation alone,
89. 3:04forget about positive stock returns,
90. 3:06should see index levels rise over time.
91. 3:08And then finally, stocks do have
92. 3:10positive expected long-term returns.
93. 3:13Indices reaching all-time highs should
94. 3:15not be news. It should be expected. That
95. 3:17said, it is worth digging into index
96. 3:20returns after all-time highs because
97. 3:22there are some interesting features.
98. 3:23Unlike the convention in common
99. 3:25reporting on index price levels, I will
100. 3:27use total return indices in my analysis.
101. 3:30That means rather than only looking at
102. 3:32stock prices, I'm including the
103. 3:33reinvestment of dividends in my index
104. 3:35level and return calculations. It's
105. 3:38honestly kind of crazy to me that this
106. 3:39is not the convention. I look at 10
107. 3:42developed stock markets and the world
108. 3:43stock market from 1970 through May 2026
109. 3:47using monthly returns and monthly index
110. 3:49levels. At the individual country level,
111. 3:51on average, this is the simple average
112. 3:53across 10 countries. 20% of months are
113. 3:57all-time highs. So, they're not
114. 3:58happening every day, but they're not
115. 4:00rare, either. 30% of months in the US
116. 4:02market have been all-time highs going
117. 4:04back to 1970, and 23% of months in
118. 4:07Canada. Italy, whose stock market has
119. 4:09struggled, has the lowest at 9% of
120. 4:11months being all-time highs. One thing
121. 4:13we do see in the data is that all-time
122. 4:15highs tend to cluster. I mentioned the
123. 4:17gambler's fallacy earlier, the belief
124. 4:18that the probability of a random event,
125. 4:20like tomorrow's stock market returns, is
126. 4:22influenced by yesterday's stock market
127. 4:24returns. Randomness is a pretty good
128. 4:25approximation for stock returns, but
129. 4:27there's evidence of a momentum effect,
130. 4:29where when the stock market has done
131. 4:30well recently, it often continues to do
132. 4:33well for a bit. We do see this in the
133. 4:35data. All-time highs are more frequently
134. 4:37followed by all-time highs than by
135. 4:39market drops or crashes. The opposite is
136. 4:41also true. Periods of high volatility
137. 4:44and lower returns tend to cluster
138. 4:46together, so there can be periods,
139. 4:47sometimes long periods, where there are
140. 4:49no new all-time highs in the stock
141. 4:51market. The world index, which is the
142. 4:53market capitalization-weighted index of
143. 4:55all the countries in my individual
144. 4:56country sample, plus a bunch more
145. 4:58countries, has had all-time highs in 31%
146. 5:01of months. Part of that is
147. 5:02diversification. When some countries are
148. 5:04down, others are up. Aggregating them
149. 5:06all together makes for a smoother ride
150. 5:08and more frequent all-time highs. The
151. 5:10next thing to understand is that average
152. 5:12returns following all-time highs are not
153. 5:14a whole lot different from returns in
154. 5:15other months. For the US market, returns
155. 5:18following all-time highs are actually
156. 5:19higher than returns following all other
157. 5:21months at the 1, 3, and 5-year horizons.
158. 5:24At the 10-year horizon, they're similar,
159. 5:26though slightly lower following all-time
160. 5:28highs. Canada is a mixed bag at shorter
161. 5:30horizons, but even closer than the US
162. 5:32market at the 10-year horizon. Other
163. 5:34countries are generally similar. One
164. 5:36notable feature in the data is that the
165. 5:371-year average return following all-time
166. 5:39highs is consistently higher than the
167. 5:411-year average return following all
168. 5:43other months, consistent with the the
169. 5:45effect. And at the 10-year horizon,
170. 5:48returns following all-time highs are a
171. 5:49bit lower than returns following all
172. 5:51other months, likely due to high stock
173. 5:53valuations when indices reach all-time
174. 5:56highs. I'll cover that in more detail in
175. 5:57a minute. The World Index has similar
176. 5:59returns at all horizons with the
177. 6:01exception of the one-year horizon where
178. 6:03returns following all-time highs are
179. 6:05considerably higher, again consistent
180. 6:07with momentum. We've seen that the level
181. 6:09of a stock market index doesn't tell us
182. 6:11much about its expected future returns,
183. 6:12and that investing at all-time highs has
184. 6:14historically resulted in positive
185. 6:16returns on average. The other issue that
186. 6:18often coincides with all-time highs in
187. 6:20the level of the stock market index is
188. 6:22high stock market valuations. The
189. 6:25Shiller cyclically adjusted
190. 6:26price-earnings ratio is a common metric
191. 6:28for measuring how expensive a stock
192. 6:30market is. When you invest in the stock
193. 6:32market, you're buying the discounted
194. 6:33future cash flows of real businesses.
195. 6:35Basically, you're buying the future
196. 6:37earnings of companies at a discount
197. 6:38today, and your expected return is the
198. 6:41discount rate. The way that math works,
199. 6:43you have a lower expected return when
200. 6:45stock prices are higher relative to
201. 6:47earnings, all else equal. That means
202. 6:49that when stock valuations are high,
203. 6:50expected returns are low, at least in
204. 6:52theory. Reality has been a lot messier,
205. 6:55but there has been a relationship. I
206. 6:56looked at 10 developed markets from 1982
207. 6:58through the end of 2024 and sorted the
208. 7:00future 10-year stock returns for 10-year
209. 7:03periods in the sample on their starting
210. 7:05CAPE ratio. So, there are groups of
211. 7:0710-year returns sorted on how expensive
212. 7:09stocks were relative to earnings at the
213. 7:11start of each period. The relationship
214. 7:13is clear. Higher starting valuations
215. 7:15lead to lower realized returns on
216. 7:17average. But, there's a lot of noise
217. 7:19when you dig in deeper. Even when
218. 7:20starting valuations are high, there can
219. 7:22be periods where future returns are
220. 7:24still high, even if the average return
221. 7:26for all periods with that starting
222. 7:27valuation are lower. This wide
223. 7:29distribution of outcomes makes timing
224. 7:31the market based on valuation ratios
225. 7:33really hard to do. It's important to
226. 7:34look outside of the US market to see
227. 7:36this. There's often a lot of doom and
228. 7:37gloom about the US market when the CAPE
229. 7:39ratio gets above 40 because historically
230. 7:42most periods following that level of
231. 7:43market valuation in the US market have
232. 7:46been low or negative returns. But
233. 7:48including other countries in the sample
234. 7:50tells a different story. All-time highs
235. 7:52in the stock market are common. Using
236. 7:53total return indices, which I would
237. 7:55argue are a much better representation
238. 7:57of the stock market than the commonly
239. 7:58cited price only indices, roughly 30% of
240. 8:01months hit all-time highs from 1970
241. 8:03through May 2026, and the average
242. 8:06returns that follow all-time highs tend
243. 8:08to be higher in the short term likely
244. 8:10due to momentum and a little lower in
245. 8:11the long term likely due to high stock
246. 8:13valuations when the index is hitting
247. 8:15all-time highs. In either case, both
248. 8:17expected and on average realized stock
249. 8:20returns remain positive following
250. 8:22all-time highs. Stock valuations do have
251. 8:24a more obvious relationship with
252. 8:25expected future returns, but it's noisy
253. 8:28enough to be of limited use in making
254. 8:29real financial decisions. Together, this
255. 8:32suggests that the best strategy is
256. 8:33simply staying in your seat and sticking
257. 8:35to your plan even when the level of the
258. 8:36market index is hitting new all-time
259. 8:38highs. Also, don't forget that when
260. 8:40making market timing decisions, you have
261. 8:42to be right twice. Once to get out of
262. 8:44the right time and then again to get
263. 8:45back in at the right time. This is much
264. 8:47easier said than done and is more likely
265. 8:49to lead to losses than gains. If you
266. 8:51want to learn the basics of setting up a
267. 8:53long-term investment plan, you can click
268. 8:55here.