How rare is a record in the S&P 500?

On 4 August the S&P 500 rose 1.79% and closed at 7,736.52, above 7,700 for the first time. The same day the Dow Jones added 907.47 points, or 1.71%, and closed at 54,085.88, above 54,000 for the first time.

It was the first record high in two months. That second sentence is the more interesting one.

What a record means in an index

An all time high means exactly one thing: the index has never been higher. It does not mean shares are expensive, and it does not mean they are cheap. It does not mean the rise continues, and it does not mean it stops.

An index that rises over the long run spends a large share of its life near its high. That is not an anomaly, it is the ordinary result of gaining ground over time. The unusual thing is not the record. It is the stretches without one.

There is something else that is easy to forget. The number itself says nothing about valuation. The 7,736 level is not more expensive than 4,000, in the same way that a kilogram is not more expensive than a metre. Valuation comes from the relationship between price and company earnings, and that relationship can be lower at a record than it was during a fall.

The two months that made no headlines

The previous peak had been set in early June. Between the two there was a decline and a recovery, together lasting two months. The recovery made the front page. The decline, much less so.

That is how market coverage works. A record has a date and a number, so it is easy to write. The slow road towards it has neither. The reader is left with the impression that markets rise in a straight line, when in truth they rise through wobbles that simply do not deserve a headline.

What drove the move that day

Three factors were cited:

1. Strong corporate earnings. Real profits, already reported.
2. A rebound in technology shares. The part of the index that carries the most weight.
3. Hopes of progress on the Strait of Hormuz. An expectation about something that has not happened yet.

Two fundamentals and one geopolitical headline.

That is worth holding on to. The same close recorded as a record contains both company profits and an assessment of a narrow shipping lane. The S&P 500 next to the Nasdaq and the Dow shows why the three indices react differently to identical news, and why the Dow, weighted by share price rather than by company size, often paints a different picture from the other two.

Is a record a bad moment to buy?

If you have money to invest, a record brings an uncomfortable thought: am I buying at the top?

The honest answer is that nobody knows where the top is except in hindsight. That is precisely why methods exist that do not require you to know. Cost averaging, meaning a fixed amount at a fixed interval, does not get you the best possible price. It gets you something more useful: a decision you do not have to make again every time an index prints a new high.

What to take away

• A record describes the past, it is not information about the future. The level of an index says nothing on its own about valuation.
• Indices measure what they were designed to measure, and two indices of the same market cannot be compared in points.
• For anyone investing at a steady pace, an all time high does not change the method. The RHYTHM guide is built on exactly that idea.