Are All-Time Highs in the S&P Sustainable This Summer?

Jonas Elmerraji, CMT

The S&P 500 (^GSPC) - is 6% from all-time highs right now – how long can it stay there?

The ferocity of the snapback rally in the S&P 500 this year has been impressive. It’s been the fastest rebound in history, in fact.

(Of course, the market is still down a lot more in 2020 than the S&P might suggest…)

But as stocks bump up against new highs, an important question is how long they can stay there.

Answer: a long time.

Many investors don’t realize it, but the market trading at or near all-time highs isn’t some kind of anomaly – it’s actually normal territory for the stock market.

Looking back since the end of 1927, the S&P 500 and its predecessors have spent 45.9% of trading sessions within 10% of all-time highs. More than a third of all trading sessions in that 92-plus year stretch have closed within 5% of all-time highs, too.

The numbers are even more compelling if you look at post-1950 data: the S&P 500 has spent nearly 60% of trading sessions within 10% of an all-time high over the last 60 years.

Even a glance, it’s not hard to see that the S&P has spent most of its time at or near highs over the last few decades. The chart below only shows the S&P 500 when it’s been in a 5% or worse drawdown since 1990:

dd-transp-lt

As you can see, it’s barely there – drawdowns in the S&P have been localized and short-lived. Stocks spend most of their time at or near their highs.

And, unpleasant as 2020’s COVID-19 correction was, it’s faint even in the context of the dot-com and 2008 bear markets that serve as investors' other "recent" reference points.

daily_dd_dist
Not surprisingly, the long-term drawdown distribution is fat-tailed -- but the vast majority of the density lives on the left edge of the chart.

What does all of that mean for the stock market this summer?

Primarily, it means that, contrary to popular belief, stocks don’t start some kind of crash countdown timer once a new high-water-mark gets set in the S&P 500. The big indices are much more likely to hang out at or near their highs for extended periods than most investors realize.

Comments (1)
No. 1-1
Ed Ponsi
Ed Ponsi

Spot on, I agree. Lot of uncertainty - economy, elections, covid - BUT we have central banks supplying rocket fuel. Don't fight the Fed!


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