Timing The Market, S&P500 1980 – 2016

As of this writing the stock market is at or near all-time highs, and I see a lot of people asking if this is a bad time to get into the market, or a good time to get out of the market.  Of course there’s no way to know in this specific instance what the best thing to do today is, but we can look at historically what the market has done over the next 12 months when it was currently hitting new highs.

In another analysis I looked at something similar, the results of sitting out a bear market (i.e., going to cash after a market pull back of 20%) vs. the results of riding out a bear market (i.e., remaining in the S&P500).

In this analysis I look at it a slightly different way.  Given the current value of the market relative to its highest value over the previous 12 months, what is the average return over the next 12 months.

I started with the closing price of the S&P500 on the first day of each month from 1980 – 2016.  I then calculated the highest monthly closing value over the previous 12 months, and the return on the S&P500 over the following 12 months.

Next, I divided the months into categories based on their closing value as a percentage of the highest closing value over the previous 12 months.  I.e., the categories are >0.95, 0.90 – 0.95, 0.85 – 0.90, etc.

For each category, I calculated the number of occurrences of the category, and the minimum, maximum, and average 12 month return of each category.  Let’s take a look at how that turned out:

Closing Price / 12-Month High PriceOccurrencesMin 12-Month ReturnMax 12-Month ReturnAvg 12-Month Return
>0.95298-39.5%+49.1%+10.4%
0.90-0.9548-38.5%+39.1%+6.9%
0.85-0.9024-44.8%+45.1%+1.2%
0.80-0.8524-28.2%+52.3%+9.3%
0.75-0.8016-24.7%+32.8%+7.4%
0.70-0.757-21.7%+36.1%+16.0%
<0.708+7.0%+50.3%+29.3%

The thing that stands out most to me from this table is that the market has spent most of its time (about 70% in fact) over the past 37 years within 5% of its 12-month high.  So avoiding the market whenever it’s near or hitting 12-month highs would mean sitting out the market 70% of the time.

Moreover, the average 12-month return when the market was within 5% of its 12-month high was a very respectable 10.4%.  That’s better than the average return of all other categories, except when the market was more than 25% below its 12-month high.  And I’m confident that when the market is that low, people are very uncomfortable buying.

The average 12-month return for all categories was positive.  The category with the worst average return over this study period was when the current price was between 10% and 15% lower than the previous 12-month high.  There were some spectacularly good and bad returns under those conditions that happened to average out to about 0.

From this data it appears the answer to the question “Is this is a bad time to get into the market, or a good time to get out of the market”, when the market is near 12-month highs, is a qualified ‘no.’  Qualified because past performance doesn’t guarantee future performance, and ‘no’ because, on average over the study period, it turned out to be a pretty good time to be in the market.

This is an analysis of past performance, but past performance is not a guarantee of future performance.

Comments / Questions: joseph AT StockMarketMovement.com