Does a new market high signal that it is too late to invest?

As we close out the first half of 2014, the U.S. equity market (represented by Russell 1000® Index) is positioned near an all-time high.  Market highs are often seen as times to rejoice, but there appears to be as much trepidation as enthusiasm this time around, leading many investors to delay committing additional assets to their investment portfolios until the “inevitable” market correction occurs.

It may be that the last two bear markets (March 2000 – September 2002 and October 2007 – March 2009) are weighing heavily on investors’ psyches. While there is no magic elixir to help people forget those difficult experiences and feel better about investing today, maybe addressing a few common concerns can help ease the apprehension.

Buying near the market high

Timing investment purchases sounds great on paper, but is very difficult to accomplish in reality. When times are good, investors can be concerned about buying in too late. When times are bad, investors tend to hesitate due to fears of things getting worse.You can always find excuses not to invest, but generally markets tend to move in an upward direction over a moderate period of time.

For instance, as shown in the chart below, the U.S. equity market (represented by the Russell 1000®Index) hit 432 new daily market highs between the beginning of 1995 through May 27, 2014. You could argue that hitting a high almost doesn’t feel special anymore. But, when you consider that the market had a cumulative return of over 600% during that period – the equivalent of a 9.9% return per year – it doesn’t look so shabby. In fact, it’s in line with longer-term averages for U.S. large cap equities. We can’t predict the future, but reasonable expectations are that this pattern could continue over the long term.
Russell 1000 Index

Source: Russell Investments. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Worries about valuation levels

Astute investors recognize that price levels alone are not a good indicator of relative market attractiveness. The relative cost an investor pays for each dollar of earnings, book value or cash flow also impact future market returns.  When current valuation measures are lower than past norms,history suggests that future market returns may be higher than historical averages. When valuation measures are higher than historical averages, it suggests that future returns may be lower than long-term averages.

Today’s price-to-earnings (P/E), price-to-book (P/B) and price-to-cash-flow (PCF) for the Russell 1000® Index suggest that valuations are slightly higher than average, but relatively close to historical norms. These results could suggest that future returns may be tempered, but do not foretell a looming market correction.
Russell 1000 index valuations

Source: Russell Investments. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Concerns about the economy

Although markets don’t move in lock-step with economies, markets tend to be heavily influenced by current and anticipated economic conditions. Last year’s strong global equity returns were heavily influenced by the anticipation of positive global economic growth in 2014. This year is anticipated to be the first year since 2010 where positive growth will be experienced across Europe, Japan, the United States and the emerging markets. Delivery on that growth expectation will help to justify 2013’s strong results and hopefully enable markets to keep moving forward.
Imf projected growth


The bottom line

Is the market overvalued? Is it too late to invest? Is a correction coming?

If you are asking these types of questions, consider the following:

  • Although U.S. equity markets (represented by the Russell 1000® Index) are at or near all-time highs, that doesn’t necessarily indicate they’ve peaked. Since January 1995, the U.S. equity market has seen 432 new daily highs and has eventually moved higher after each one.
  • Market valuations are a good indicator to help set future return expectations. At today’s levels, markets appear to be slightly more expensive than historical averages. This does not suggest a correction, but helps establish a reasonable expectation for more modest positive results.
  • The global economic recovery continues to move forward. 2014 is the first year since 2010 where there is an expectation for positive growth across all the major economic regions. Positive economic growth tends to bode well for capital market results.

Source: Russell Investments