Overnight the US market continued to climb higher. The S&P 500 was up just over half a percent and the Nasdaq up 0.6%. Locally, our S&P/ASX 200 was up 0.8% yesterday and is pointing towards increasing again today. It will give the all time high reached in May a run for its money.
- S&P 500 = 0.5%
- Nasdaq = 0.6%
- Aussie dollar up 0.1% to 65.23 US cents
- Iron down 0.4% to $94.35 US a tonne
All time highs are more common than you think
There are plenty of legitimate excuses not to invest. For example, “I don’t have an emergency fund stashed away”. If you don’t have this you run the risk of interrupting your compounding.
“I want to buy a house in the next two to three years”. Again, good excuse not to invest. Two to three years is too short of a timeframe to be jumping in to the stock market. You’re at risk of sequencing risk. This is the risk of when returns – positive and negative – happen and Murphy’s Law suggests those negative returns will happen just before you need that cash to put down your deposit.
“The market is too high”. Bad excuse. Throw this one in the bin or just lie to me and say either of the above. The market is always hitting all time highs. It’s what it does. The S&P 500 averages between 17 to 20 all time highs a year. And UBS research shows that the S&P 500 trades within 5% of an all time high 60% of the time.
What is more interesting is the UBS research on returns following all time highs. Over a 60 year period one year, two year and three year returns post an all time high have on average have been 12%, 23% and 39% respectively.
No one is saying throw caution to the wind and dive in feet first after an all time high. You still need to invest in a risk profile that suits your timeframe, be diversified and keep an eye on costs. What we are saying is if you wait for markets to be well below all time highs and sit in cash, you’ll be waiting a fair while and achieve a lousy return.
“You can’t stop progress”
Why does this happen? Well, as Bill Heslop in Muriel’s Wedding would say, you can’t stop progress. The relentless march forward of markets is driven by population growth, productivity growth and reinvestment into capital markets. It’s just what we do. Capital forever finds its self flowing towards greater returns.
What does that next pathway of productivity growth and reinvestment look like today?
Yesterday I went along to a presentation hosted by Global X, presenting was their Head of Thematic Strategy Scott Helfstein. Scott is a fantastic presenter, incredibly animated and a lot of fun.
Scott had a fantastic chart showing the innovations of each stock market age. We’ve just come through the information age, where services like Google, social media, big data sets etc dominated. This was the age where information was at our finger tips.
What’s the next age? Well according to Scott we are right at the start of the automation age. That thinking we did with the information is going to be automated. And according to Scott the automation age won’t be limited to the big dominant tech players, it will transcend industries creating efficiencies and increasing productivity everywhere.
It was a timely reminder that we haven’t even scratched the surface of the technology of AI. We are just at the start of a potentially multi-decade era.
Is AI expensive?
Right now the S&P 500 is trading at a price to earnings ratio of approximately 28 times. The Global X Artificial Intelligence ETF (ASX: GXAI) is trading at 32 times. Marginally higher than the market. Inevitably this will be volatile and inevitably it will look expensive and just like the market it will hit many all time highs.
GXAI is a global collection of companies that stand to benefit from the development and utilisation of AI. Yes, index investors have AI exposure through their US index funds, GXAI is aimed at complimenting this and providing a more concentrated collection of companies for investors to add alongside that index exposure.
