Is the S&P 500 reaching the 2,000 milestone cause for celebration?
The S&P 500 Index closed above 2,000 for the first time this week—a milestone that was long in the making, and one that offers psychological support to the market. But the real significance of this new record remains to be seen in what follows it. And that, at this point, is a toss-up.
There are those who argue this milestone is confirmation that the market is in the first stages of a 20-plus-year bull run. Speaking to CNBC, Chris Hyzy, U.S. Trust's chief investment officer, said that the economy is in an “elongated business cycle” where opportunities abound ahead. The S&P 500 at 2000 is, in his view, only in year five of a 20-year run.
Plenty agree with Hyzy. MarketWatch columnist Mark Hulbert, quoting a well-respected market timer today, suggested that an 8 percent move for the S&P to 2,150 by year-end is next. Hulbert pointed out that a low-interest-rate environment is at the core of this near-term outlook, but even so, a higher S&P 500 is looking likely.
“In a nutshell, there is no significance to the S&P 500 at 2,000; it’s just a number,” Rob Stein, CEO of Astor Asset Management, told ETF.com. “As long as the economic fundamentals continue at their current readings, the expected returns for equities remain higher. The risk of a significant allocation to risk assets like stocks is worth the expected return."
But there’s plenty of doubt. Consider, for example, that retail investors have largely chosen not to climb the proverbial “wall of worry” since the stock market bottomed out on March 9, 2009 after the dual shocks of $147-a-barrel crude oil prices and the subprime mortgage crisis together brought the global economy to its knees.
With that in mind, here are three things to consider about S&P’s milestone:
1. The market is breaking records, but investor money—particularly retail—remains largely sidelined.
The U.S. stock market has been rallying for the better part of five years now, but retail investors remain noncommittal. Typically, when the market hits milestones such as this latest one, you’d see investors jumping in, but that’s not happening here, Howard Silverblatt, senior index analyst for S&P Dow Jones, told ETF.com.
“This is more of a psychological move,” he said. “August is usually a light month for trading, but this year, August has been even slower than most years, with volume 4 to 5 percent less than normal.”
Right now there’s still a lot of cash sidelined, and a lot of it parked in fixed-incomelike equities such as preferred securities and dividend stocks where returns are limited, but not in the broad stock market.
On the other side, institutional money has been rather stagnant, unwilling to move out of the market despite massive gains that could, by now, have triggered some profit-taking, Silverblatt noted. Even the latest round of widespread geopolitical unrest didn’t cause institutions to seriously reallocate assets, he says.
It’s as though institutions are more afraid of being out of the market than in the market at this point, even as many call for a significant correction in the near term.
“No one has an exit plan,” Silverblatt said. “VIX is like it’s on drugs.” He notes that the VIX index, also known as the fear gauge, has been around 11, 12—far below the average of 21.09.
“We only have half the anxiety that we’ve had over the last 50 years,” added Silverblatt. “Last month, when the world was falling apart, it went up to 17—not even the average. The market is reacting well, the fundamentals of the market are good, but sales are not, spending is not and confidence is not.”
2. Milestones are good times to reassess a portfolio, and you might be surprised at what you learn.
The market essentially took 16 ½ years to double at an annual compounded rate of about 3 percent—6.2 percent with dividends. That’s a long time, churning higher for sure, but slowly.
What’s interesting is that if you invested back in 1998—when the S&P 500 first hit 1,000—in utilities, you did better than if you had invested in technology, and “you slept all the way through,” Silverblatt says.
But now, it’s “idea” companies that are doing well, rather than hardware, machinery, product-type of stocks. In other words, the sectors that did well up to now aren’t necessarily the ones you would have expected, nor are they the ones that will necessarily do well ahead.
Today Apple is the largest stock in the S&P 500. It was No. 456 back in 1998. Google is among the top 5, and it didn’t even exist publicly 10 years ago.
But looking ahead, it’s worth considering that the market of today is in “no way normal,” said Jonathan Citrin of Citrin Group. He, like Hulbert, says the unprecedented amount of central bank intervention is crucial to market run following the worst downturn since the Great Depression.
“Historic correlations are not holding up; something is amiss,” Citrin said. “The market is in no way normal, and the performance of the S&P 500 doesn’t make a whole lot of sense.” Economic growth is improving, the job market is growing, but the broad economy is recovering at a very slow pace, he notes.
Moreover, with the end of the Federal Reserve’s aggressive quantitative easing program now in sight, uncharted territory lies ahead.
“The S&P 500 is typically a leading indicator, so is this a sign of what’s to come, or is this a warning?” Citrin said. “The bottom line is people better stay really diversified.”
3. The trajectory of Treasury yields is a red flag to bulls, and suggests that this market could go either way forward.
As the S&P 500 climbed to 2,000, yields on 30-year Treasurys slipped to their lowest levels of 2014, hitting 3.13 percent this week. They are now down more than 21 percent year-to-date as demand for the relative safety of long-dated high-quality U.S. debt remains high.
That’s vastly different from their respective 2013 performances, when SPY rallied 32.2 percent, while TLT slipped 13.4 percent, and by most accounts, a surprising turn of events.
Remember that coming into 2014, just about everyone was looking for yields to slide in anticipation of a Fed rate move that now seems to be postponed because the economy—it turns out—is not as hot as we had hoped.
Inflation remains practically negligible, growth numbers are a far cry from expectations, and the global economy is nowhere near out of the woods yet. Also, geopolitical hot spots abound, and deflation is just as much a risk as inflation is at this point—particularly in the eurozone.
“We would normally be looking at Treasury yields being much higher in a market like this,” Citrin said. “People want to make money, but they are less myopic than they use to be.
“They are acutely aware of downside risk, so they want to buy stocks, but they are cautious, and they are hedging that exposure,” he added.
In the end, the S&P 500 at 2,000 could prove to be a motivating factor for either side—bulls or bears.
“It has the potential to drive us one way or the other,” Citrin said. “If we rally from here, it could encourage the bulls, but if we fail to hold at these levels, it could trigger a serious correction. It really depends on what happens from here.”