The S&P 500 just saw its best November with a gain of over 11% for the month. What should we expect going forward? Well, it depends whether you have a short-term or longer term perspective.

November saw a gain of 11.27% for the S&P 500 benchmark. That is the best November gain for the S&P 500 ever, helped by disclosures on potential vaccine efficacy and resolution to U.S. electoral uncertainty.

Now, of course we shouldn’t get too carried away. The S&P 500 came into being in 1957, so the stock market has, in fact, seen better Novembers over a longer run of history. The S&P 500 just didn’t exist then. For example in the volatile 1930s stocks gained saw staggering 30% plus returns in certain months, so this is not an all-time record. In addition, even since 1957 other months have beaten November’s recent gains. Still, a strong November now puts the S&P 500 on track for meaningful gains for the year, despite major volatility in the first half of the year.

Hitting New Highs

In terms of what’s next there are two signals that have some merit, one bullish, one bearish.

First, off the S&P 500 is very close to setting further record highs. Surprisingly, new highs are actually a bullish signal for stocks. Over the short-term once stocks hit the highest they have ever been, they tend to keep on going higher on average. The positive trend tends to inform future market direction in the short-term, on average. December also can be a strong month for markets too, though January has perhaps the best track record.

Valuation

However, the bearish signal has little to do with November’s price action and more to do with long-term valuation. Whichever way you slice it, the S&P 500 is expensive based on historical multiples. That’s not a good sign for the long-term. Over the short-term, earnings growth matters. Maybe stocks in certain sectors will over-deliver on earnings as Covid-19 fades in 2021. Perhaps that helps markets, to the extent that’s not already factored in.

However, the big problem is valuation. On most measures we’re close to all-time high valuation for stocks. That’s a hard and historically powerful headwind to overcome. Yes, multiples could go higher still, but there isn’t much precedent for that. It’s more likely that, at some point in the next decade, multiples compress back to levels closely to around half their current levels, or even less. That crudely speaking, means that stocks would halve too. Yes, earnings growth might offset some of that pain, but its hard to imagine it would offset all of it.

So that’s the challenge, yes, there are reasons to be bullish in the short-term as the market hits new highs and November’s optimism continues. However, lofty valuations make it challenging for markets to deliver continued strong performance on a multi-year view if historical valuations are any guide. The good news is that it could still be a few years until that occurs, though we can never be sure.