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The S&P/ASX 200 index has experienced a remarkable rally this week, climbing 1.2% and reaching a record high above the 8,600 mark for the first time since 14 February. This achievement highlights a robust 17% increase since the lows observed on 7 April, establishing a year-to-date growth of 5% and an impressive 11% rise over the past year.
Amid this sharp ascent, investors often hesitate to buy into markets that appear to be at a peak. Nevertheless, historical patterns reveal insights into the typical market behaviour following record highs.
Historical Context of Record Highs
Since 2000, the ASX 200 index has marked 120 weekly all-time highs, indicating that new record closes tend to occur roughly 9% of the time, or about once every 11 weeks. A close examination of these occurrences uncovers two notable patterns:
- Clustered Record Highs: The data suggests that all-time highs tend to appear in clusters.
- Sustained Growth Until Correction: These periods of new highs typically continue until a market correction unfolds.
This trend indicates that momentum builds, leading to extended stretches of performance that ultimately culminate in a pullback.
Market Performance Post-Record Highs
To assess market behaviour following record highs, we can look at performance across various timeframes after 119 recorded weekly peaks. The following table illustrates this analysis:
| 1 Month | 6 Months | 1 Year | 2 Years | |
|---|---|---|---|---|
| Average | -0.50% | +2.69% | +6.35% | +5.75% |
| Median | +0.36% | +3.28% | +10.74% | +4.94% |
| % Higher | 56% | 66% | 65% | 56% |
Summary of Insights:
- Short-Term Challenges: The one-month average indicates potential for a slight decline, likely due to overbought conditions and profit-taking.
- Medium-Term Resilience: Over six months, the market generally trends upwards, buoyed by drivers such as interest rate cuts, rising commodity prices, and earnings growth, with positive outcomes reaching their peak at this interval.
- Long-Term Strength: After one year, market momentum can continue well past the record-setting period, though this dataset is notably influenced by a significant bull market from 2003-2007, which may skew the outcomes for one and two-year performance.
Recent Trends and Future Outlook
In analysing the data from record highs post-2020, the outcomes have been less favourable, impacted by the pandemic and recent interest rate hikes:
| 1 Month | 6 Months | 1 Year | 2 Years | |
|---|---|---|---|---|
| Average | -2.27% | -2.98% | -2.80% | +0.38% |
| Median | +0.01% | -0.83% | -4.31% | -0.69% |
| % Higher | 50% | 36% | 31% | 42% |
Moving Forward
Historically, record highs are often the beginning of further upward movement. The conditions currently appear favourable, with:
- Anticipated rate cuts from both the Reserve Bank of Australia and the Federal Reserve
- Stabilising bond yields
- Low volatility measures (VIX)
- Diminishing recession fears
- Positive trade discussions, particularly with China
However, a significant concern remains regarding valuation, as the ASX 200 is currently trading at a price-to-earnings ratio around 19 times, surpassing previous high points and indicating the market is trading over two standard deviations above historical averages.
Analysts from Macquarie have pointed out that while elevated valuations are not inherently detrimental to market performance, they do complicate a bullish outlook compared to the past bull market era, where robust earnings growth kept pace with price increases.
Conclusion
While the ongoing momentum of the market is undeniable, it is crucial to remain aware of the historical patterns indicating clustered highs and potential price corrections ahead. The current environment, supportive of growth through global trade enhancements and rate cuts, calls for a discerning optimism. Investors may adopt a "let the good times roll" mentality for now, with the understanding that vigilance is necessary to recognise when the pattern of clustered highs might shift.
