It took nearly eight months, but the Dow finally closed at a new all-time high for the first time since late January. Various other indexes have been making new highs for a while now, which begs the question: What does it mean for investors that the granddaddy of all stock indexes came late to the party?
“The Dow joining the ‘new high’ party is a nice sign, as historically when it goes seven months or more without a new high, the returns going out a full year after that initial new high have been much better than your average Dow returns,” explained Senior Market Strategist Ryan Detrick.
As our LPL Chart of the Day shows, since 1950, there have been 15 other times that the Dow went at least seven months without a new high. Sure enough, a year later it was higher 12 times, with an impressive average return of 13.7%—more than a full 5% above the average 12-month return. Additionally, the returns three, six, and 12 months later were all better than the average returns as well.
If this sounds familiar, that’s because we did a similar study a month ago when the S&P 500 Index made new highs for the first time since late January. The future average returns were quite similar, in that you saw stronger than average returns going out the next 12 months.
So, does a new high in stocks tell us anything about the economy? Remember, we usually see stocks break down ahead of a recession, while they turn higher ahead of a recovery. Here’s the good news: New highs in the Dow have historically signaled a significantly lower chance of recession over the coming year. We looked at all the months that saw a new all-time high for the Dow going back to 1950. Sure enough, the U.S. economy fell into a recession only 0.8% of the time within the subsequent six months and only 2.2% of the time 12 months after a new high. Considering that 13.5% of all months have been in a recession over this same timeframe, one could say new highs for the index Charlie Dow created back in 1896 could be another great sign that the economy could still be humming a year from now.
For more of our thoughts on the new Dow high, be sure to read our latest Weekly Market Commentary, due out later today.
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