Cac 40: On the stock market, should you sell when you have reached a new record?

(News Bulletin 247) – [AVIS D’EXPERT] Stock markets on both sides of the Atlantic are hovering around their all-time highs. Investors should consider whether to sell. Decryption with economist Mickaël Mangot.

Behavioral finance shows that stock market highs, whether one-year or historical, are important reference points for investors. We notice an influx of sell orders from individuals when stocks or indices reach these levels. We also observe that the expectations of investors or analysts for the future are less optimistic when highs are reached, following an anchoring effect.

But is now really the right time to sell? It depends on the horizon. In the short term, the highs often cause moments of pause during which the markets absorb the influx of sales orders from individuals. During these phases, prices drop a little. We are undoubtedly in this situation currently. In the medium term, however, prices rise because “blind” sales by individuals tend to cause prices to underreact to fundamentals.

When the results were published, the markets realized that the price declines were not relevant given the good health of the companies and the prices caught up. Numerous academic studies show that reaching new highs is good news for profitability in the medium term, contrary to intuition.

Researchers have been able to observe that the highest highs are atypical moments on the stock markets during which there is a fairly massive transfer of ownership of shares from individuals (sellers) to institutional investors (buyers). This movement, on average, is detrimental to individuals because, as has been said, prices beyond a few months tend to progress after highs have been reached.

Records… actually banal

Certainly, highs then sometimes gave way to violent falls in the markets, as in 2000 and 2007. But above all this shows that we remember particularly significant highs, peaks which were not exceeded for several years. Which is quite rare actually. An investor present in the markets since 1990 will have already experienced 253 historic highs (at closing) on ​​the CAC 40 and 669 on the S&P 500! The all-time highs are, after all, fairly banal events. Most were quickly overwhelmed and did not immediately escalate into crashes. By remembering a few atypical examples to wrongly deduce a general rule, we succumb to a well-known cognitive bias: the availability heuristic.

Number of all-time highs (at close):

The rule to keep in mind is that an all-time high is bound to be exceeded. As Sherpas will confirm to you, behind a summit there is often a higher peak that we cannot imagine when we are below. And between the two peaks, there is a pass… On the stock markets, prices follow a positive trend which follows the growth of corporate profits (significantly higher than inflation).

Aversion to regret

This is very clear when we look at a historical graph of company results, especially when we smooth over 10 years to remove temporary air gaps due to recessions. Someone who wants to take profits when a high is reached de facto focuses on the intrinsic (high) volatility of the stock markets and neglects the long-term trend.

Which is very costly because the investor generally suffers from regret aversion. He finds it difficult to buy back at prices higher than his selling price or to buy when prices have already rebounded strongly from a low point. To sell during peaks, we therefore take the risk of leaving the market for a long time if the perfect psychological conditions for return are not met.

By Mickaël Mangot