The original version of this article first appeared in The Business Times. 

What is driving markets to new highs?

When the markets suddenly fell following the Tariff Wars announced by Trump in April, we tried to bring back some perspective about the worries and concerns of investors. We have talked about how global stock markets, especially the US stock market, have ridden out volatility and fluctuations in price movements to continue to grow and rise over long periods of financial history. 

However, when markets are down, it presents a great opportunity to get a bit philosophical about investing and also think about why you are investing. So we mentioned the longer and broader perspectives that are not normally discussed in these circumstances but are highly relevant. 

We talked about the history of the universe and how the universe has never stopped expanding, with scientists thinking that it expands at an accelerating pace. We brought up the fact that the human race has continued to expand with the human population reaching new historic highs, crossing eight billion in November 2022. It took all of human history to reach one billion at the turn of the 19th century, before taking just 123 years to double to two billion. Since then, it has taken less than 100 years to quadruple to eight billion. Human population growth has accelerated. 

We mentioned that the quantum of money and the total global liquidity have continued to expand just like the US fiscal balance sheet and monetary base. All systems involving nature and humankind–the laws of nature–have always had an inflationary and expansionary nature designed into them. 

So when you look at the continued growth in sales and earnings that are the backbone of the growth in the value of these companies, it is driven by the ever increasing number of people who use these goods and services, and as such, the inflationary nature of price, money and economic systems. It is no wonder that markets continue to go up over the long term. 

What normally happens when markets reach new highs?

Talking of laws of nature, many investors think that when markets reach new highs, the laws of physics apply to financial markets too. The common adage is  “What goes up, must come down”.  As markets rebound quickly from lows or power ahead to new historical highs, it’s a common misperception that is repeated. The vast majority of people, when asked what happens after the market reaches a new historical all-time high, think that the market will fall thereafter. 

At first, it seems so logical. The human brain is conditioned to mean reversion, especially when we say words like “all-time high”, or “a peak” and think that the next move is down, as we apply the laws of gravity to financial markets. The historical and empirical evidence and a more scientific approach to this subject backed by data, tell us that people are applying the wrong laws of nature.  This, in turn, causes us to make the wrong behavioural decisions and hold false beliefs based on unproven evidence or wrong assumptions and thus hinders us from achieving good or better investing outcomes. 

For the popular S&P 500 index, which also has one of the longest historical track records, the historical data gives us a very strong and consistent message. Normally, the markets, after reaching a new high, will go on to mark another all-time high due to the long-term direction of markets. 

Markets fall, but they don’t stay down

Another common mistake investors make is to confuse the fall in markets during the year versus the full year returns. We often make the mistake of thinking that the falls in markets or volatility during shorter periods of uncertainty are permanent, and we worry about markets falling more. 

However, once again, historical evidence suggests that if there is a correction in markets, time and again, the right strategy is to buy more, not sell. If we look at just the past 15 years and even 2025 year-to-date, the markets fell during the year between just -2.6% in 2017 to a whopping -33.8% in 2020 during COVID-19.  However, the market not only recovered to post a positive return of 16.4% for the full year in 2020 but averaged an annual return of more than 15% during that 15-year period. Even in 2025, we have already seen a fall in markets from the peak to trough of -18.8%, but we stand today at a new historic high and a positive return of 7.5% for the year. 

The market only showed a small negative return in 2018 and a bigger fall in 2022, but 14 out of 16 years (including 2025) is a positive year despite markets often falling by double digits during the year. Yes, markets always fall at some point, but it doesn’t stay down. 

Why USD weakness and SGD strength are nothing new

Now that we have ascertained that new record highs and falling markets in the short term are not something to be worried about, but in fact the norm, how do we go about investing now? Should we be worried about the tariff wars, the geopolitical extreme events like wars? What about the economic concerns of the rising risk of stagflation in the US even as China still struggles to get its engine of growth going again? 

If we have learned anything from financial market history, it is that geopolitics or local politics rarely have a lasting impact on markets. Furthermore, even economic growth, while relevant, does not directly correlate with markets often because it is a very lagging indicator with inaccurate data. The markets are driven by the underlying fundamentals of the companies listed on the markets. 

The asset class that the tariff wars and geopolitics do have a meaningful and lasting impact on is currencies. The protectionist and isolationist policies of the United States have raised long-term concerns over the hegemony of the US in the global context. Furthermore, the burden of rising fiscal deficits and the continued rise in US government debt has led to bond vigilantes causing long term treasury yields to rise. Thus the US dollar has been hit hard as investors scramble to diversify their risk. 

However, as has often been the case, the demise of the US stock market, the US economic resilience and the position of the US dollar is premature. The dominance of the US market in global stock markets as well as other financial markets and trade means the US Dollar is unlikely to be overtaken as the pre-eminent currency globally in the near term. 

However, we must be aware of the risks over the long term of structural problems that must be addressed and weigh that against the possibility of a rebound in the short term. Singapore based investors should always look at market returns in Singapore dollars and also invest to minimise the currency risk, as future liabilities are also in Singapore dollars.