What This Rare Milestone Could Mean For Stocks

The three major stock market indexes hit record closing highs yesterday. As you might have guessed, this represents a rare milestone. Historically, the Dow, S&P 500 Index (SPX), and Nasdaq Composite (COMP) haven't simultaneously settled at all-time highs since the late 1990s.

How have stocks typically reacted after such rare occurrences? To determine the answer, we enlisted the help of Schaeffer's Senior Quantitative Analyst Rocky White, who put together the series of charts below. For clarity's sake, these charts look back to 1980, and only include signals that follow a prior signal by at least six months. Let's start with the Dow's performance after the three major indexes close at a high, comparing it to its anytime performance.

As you can see above, blue-chip stocks have tended to underperform in the short term following the past nine signals. The Dow has tended to pull back sharply post-signal -- down 1.3% in the ensuing two weeks (vs. an anytime gain of 0.4%), with just 22.2% positive (vs. 58.6%). However, from three months onward, the Dow's post-signal returns begin to outperform significantly. Interestingly, volatility -- as measured by standard deviation -- is lower across the board, likely due to diminished fear levels when stocks have been outperforming.

Dow returns were very impressive the last two times all three indexes ended at record highs (in 1995 and 1998). Based on the chart below, the blue-chip benchmark didn't miss a beat as it usually does, but outperformed across the board.

It's a very similar story on the SPX -- especially with respect to lower volatility -- as you can see in the chart below. Two weeks after the signal, the broad-market index has averaged a 1.3% drop (vs. an anytime gain of 0.4%). But while the tide shows some signs of turning by three months, the outperformance doesn't carry through the way it has with blue-chip stocks. One year out, the post-signal and anytime returns are similar (8.2% vs. 9.7%), while the percent positive is nearly identical (77.8% vs. 76.6%).

Again, here's the year-by-year breakdown of SPX performance after the indexes all close at highs. As with the Dow, the last two occurrences have been very good to stocks on the SPX.

Rounding things out, here's a summary of COMP returns after the signal. It looks like tech stocks are a more mixed bag. While they've tended to outperform sooner (i.e., by one month), there's no discernible or consistent pattern. Put simply, the post-signal returns seemingly alternate between overperformance and underperformance, on both an average-return and percent-positive basis.

If you're looking for takeaways, the first is that the Dow, S&P, and Nasdaq all experience some short-term speed bumps after hitting highs. Second (and related to the prior observation), the longer-term performance of stocks is generally quite strong after these signals, based on both average returns and percent positive. Lastly, volatility tends to be lower than usual in these environments, as stock gains alleviate fear. 

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