“When markets hit new highs, is that an indication that it’s time for investors to cash out?”
This is the question asked by the research team at Dimensional in their new white paper “New Market Highs and Positive Expected Returns.” With new all-time market highs being reached earlier this month, and the psychological watermark of 20,000 on the Dow Jones industrial average close to being broken, it seems perfectly logical to wonder if future returns might be lower or if a correction should be expected in the near future. Dimensional looks back over 90 years of U.S. equity market history and reports on some surprising results. What they find is that markets are usually higher one year after breaking an all-time record, not lower as some might fear. In fact, the market ended up higher in 80.5% of the periods studied, indicating that new highs are much more likely to lead to positive future performance than negative. What we can learn from this is that new market highs are a very poor predictor of future market corrections and crossing this psychological threshold shouldn’t impact how our investments are managed.