... and why 2018 could be even better
The Dow Jones Industrial Average (DJIA), S&P 500 Index (SPX), and Nasdaq Composite (IXIC) on Monday made simultaneous all-time closing highs for the 26th time in 2017 -- a new record. The previous record occurred in 1995, in which the three major stock market indexes made 25 closing highs in tandem. Below, we take a look at how the Dow, S&P, and Nasdaq tend to perform after moving to multiple record highs in unison.
Aside from 2017 and 1995, the only other year in which the trio made more than 20 simultaneous all-time closing highs was 1986, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Furthermore, just eight other years before now did the Dow, S&P, and Nasdaq accomplish this feat -- what we'll call a "signal" -- more than 10 times. All of those years were between 1983 and 1999, with the last coming just before the dot-com bubble burst. For reference, in 2016 this signal sounded eight times, but it was the first year since 1999 to generate any signal.
Obviously after the last year in which there were 10 signals, back in 1999, the stock market didn't fare so hot. The Nasdaq dropped more than 39% in 2000, as the tech bubble burst, while the SPX fell more than 10%. The Dow suffered a 6.18% loss. However, most of the time the stock market outperformed after years in which there were at least 10 signals.
Specifically, the SPX was higher 87.5% of the time in the subsequent year, with an average return of 12.9%. That's compared to an average anytime one-year return of 7.61%, with a positive rate of 70.3%. The Dow, likewise, was higher 75% of the time a year after at least 10 simultaneous highs were achieved, with an average gain of 11.78%. That's compared to an average anytime one-year return of 7.78%, with a 70.3% win rate.
The Nasdaq is the one to watch, as the index is positive just 62.5% of the time after these years, compared to 75.7% anytime. But the tech-rich IXIC's average one-year return after at least 10 tandem highs was 16.15%, stronger than its average one-year gain of 11.42%. Again, though, the numbers are dragged down by a steep decline during the dot-com bust.
In conclusion, if past is precedent, 2018 could be better than usual for the stock market. What's more, we just entered the most bullish period of the year for stocks, historically.