By Mark DeCambre, MarketWatch
History shows record run doesn't mean big setback around
corner
Wall Street partied like it was 1999 on Thursday.
The Dow Jones Industrial Average , S&P 500 index and Nasdaq
Composite Index notched record highs on the same day for the first
time since Dec. 31 1999.
Friday's action wasn't as ebullient, but the Nasdaq Composite
still managed to carve out another all-time closing high of
5,232.89.
So, what's next for this stock market?
Well, we all know how things ended up in 1999 as the dot-com
boom was at its peak. Stocks rose. In fact, the tech-heavy Nasdaq,
which was teeming with hyperinflated stocks like Pets.com, rallied
for three months, gaining about 24% to a peak of 5,048 on March 10,
2000, before the dot-com craze soured, and badly.
From March 10, 2000, the Nasdaq gave up more than a third of its
value to hit 3,321.29 on April 14, 2000, according to FactSet data.
Thereafter, a lot of volatile trade would follow, which would swing
the Nasdaq up and down, but, ultimately, it was the start of an
ugly downtrend for the index, and stocks overall.
But, it isn't so easy to draw parallels between those
bubblicious days and recent records notched by stock
benchmarks.
Most notably, on a price-to-earnings basis, Nasdaq-traded stocks
boasted a price-to-earnings, or P/E, ratio of 72, compared with
around 21 now. S&P 500 stock boast a P/E of around 18. That is
pretty lofty for large-cap stocks but cheap compared with 28 back
in 1999.
Moreover, data trackers at Bespoke Investment Group say the
three main stock-market indexes have finished in record territory
on the same day on 149 occasions dating back to 1980. But with the
exception of the aforementioned 1999 period, such a record trifecta
has been more of a bullish indicator than a harbinger of an
impending crash, as the chart below shows:
Prominent market technician Tom McClellan, separately, makes a
point that the level of quiescence in the market can be interpreted
as bullish. According to McClellan the past two years marks the
lowest level of volatility in the S&P 500's history.
McClellan explains that low volatility, or periods of relatively
calm, usually precede a longer-term uptrend in stocks. One measure
of volatility, the CBOE Volatility Index , closed at nearly a
two-year low at around 11 on Friday.
"The point is that most of the time, if something or someone
doesn't interfere, these quiet periods are followed by strong new
uptrends," McClellan said in a Friday note.
Read more about McClellan's take on the market on his website
(https://www.mcoscillator.com/).
So far, the dominant influence on the market has been central
banks. The Bank of Japan, European Central Bank, and most recently
Bank of England, effectively have unfurled a raft of
quantitative-easing programs that have driven down yields of
government bonds to historic lows, driving trillions of dollars in
sovereign paper into negative-yielding territory.
On Friday, the 10-year Treasury note touched its second-lowest
yield, before regaining some ground to finish at around 1.51% amd
the 30-year Treasury was offering a yield of 2.234% late
Friday.
Those meager yields levels mean that despite grousing about
elevated stock valuations and poor corporate quarterly results,
investors aren't finding a lot of safe options to put their money
and eke out a decent return.
Bespoke statisticians say 41% of stocks on the S&P 500 offer
a richer yield than the so-called long bond, or 30-year note. And
more than 60% of S&P 500 shares pay a better yield than the
benchmark 10-year note (see chart below).
Bespoke makes a further point that, the S&P 500 total return
index, which reinvests dividends into the market, has returned a
whopping 989% since 1990, compared with a return of 517% for the
S&P 500 over the same period, as the chart below
illustrates:
But not everyone is presently pitching the virtues of stocks as
investors fret about the sustainability of new highs for stocks,
against the backdrop of ultralow yields and weak earnings.
John Kosar, chief market strategist, at Asbury Research, says
that at this point in the market's cycle the risks of a tumble in
stocks might outweigh the rewards of further clamber higher:
The US Stock Market: Our work continues to suggest that near term downside risk currently exceeds upside potential, but that the minor pullback we are expecting is likely to provide a better buying opportunity later on this quarter as numerous indexes and influential individual stocks target an additional 6% to 14% advance, overall, during the next one to several quarters. It will take contracting investor assets amid increasing volatility and a confirming negative shift in monthly momentum next week to confirm that the decline we are expecting is under way.
Economy
Looking ahead, market participants will be awaiting minutes from
the Federal Open Market Committee's July policy-setting meeting,
due at 2 p.m. Eastern Time on Wednesday.
A raft of economic reports will be closely watched for the
health of the market. Those include the Empire State Index and a
reading of home builders on Monday. The Consumer Price Index,
housing starts, building permits, industrial production and
capacity utilization are all due Tuesday.
Earnings
On the earnings front, Home Depot (HD) on Tuesday, Target
Corp.(TGT), Cisco Systems(CSCO) and Staples lnc.(SPLS) on
Wednesday, and Wal-Mart Stores Inc.(WMT) on Thursday, are the main
quarterly results investors will look for, as the earnings season
comes to an unofficial close next week.
(END) Dow Jones Newswires
August 13, 2016 08:00 ET (12:00 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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