A Mixed Reaction to S&P 3635.71

Or 3635. In Total Return terms. Photo by Spencer Platt/Getty Images.

The S&P 500 Total Return Index closed at 3635.71^[i] on Tuesday, hitting its 115^th all-time high of this bull market.^[ii] But for some reason, the punditry focused on the Price Index. Probably because it closed above 2,000^[iii] for the first time. Huzzah! Round number! Media frenzy time! Some are popping the champagne and ordering more for 4000 (and we're pretty sure they aren't eyeing the Total Return Index, though they may just like champagne). Others are less enthused, suggesting even 2100 (all of 5% higher than Tuesday's close) won't come for a long while. The varied opinions-from wildly bullish to sad-sack-indicate just how mixed investor sentiment still is. In our view, that's bullish-the euphoria that commonly accompanies market tops remains far off.

The media response to the last nice round number (1900) was rather ho-hum. But this one has, you know, an extra zero. And it starts with a two. Reaching 2000 just sounds so much more epic. Perhaps that's why there was a bit of euphoria in some corners of the Internet. Like the "it's going to 4000" champagne poppers. Don't get us wrong-we're bullish, too!-but we also don't believe it's possible to forecast markets more than 18 months or so out, and it seems a wee bit of a stretch to assume the S&P 500 doubles by then. Same goes for the pundit claiming we're five years into a 20-year bull, saying, "When you really think about this, this is an elongated business cycle. You're going to have fair value through most of it. You're not going to get a lot of overvaluation." This is also way premature. Maybe this bull does last longer than most! But you can't know that today. You also can't know what sort of a premium investors will place on earnings over the next 15 years.

If you're thinking, "Geez, all that sounds an awful lot like early 2000-the year, not the index level, that is," well, you're right. But these views are a tiny minority. Most of the optimism surrounding the milestone is rational. Some of it might sound euphoric, like the analyst who changed his flat year-end forecast to 2300, making him "the most bullish analyst on the Street," but that's only 15% away-sounds big, but markets can move fast (and it would be consistent with other midterm election years). Many experts simply expect the bull to continue, "amid rising corporate profits, an improving economy and valuations that aren't cheap, but aren't overly expensive either." Seems about right to us! And the thaw in sentiment seems right on schedule-it's normal for confidence to grow as a bull market matures. This is the good optimism-the kind that drives investors to bid stocks up in a bull's second half. It can grow for quite a while without turning to euphoria.

Especially while doubters remain, as they do today. Some call the current environment "euphoric" and warn, "NOW IS THE TIME TO SELL." Others caution it's time for "mean reversion" and, "In financial markets, new paradigms usually don't last." The "impending correction" camp thinks S&P at 2000 means we should brace for "a big smackdown in the market come this fall." One outfit claims some charts say that smackdown could be a 50-60% drop. These are the kinds of things you want to see during a bull market-usually, you don't hit a euphoric peak until the dug-in permabears turn bullish. Others still figure the bull is particularly fragile and could splinter any moment. That some are still calling for the sky to fall-and others aren't making fun of them for it-is a sign sentiment is well in check.

Sentiment is about all we can glean from this milestone though. Knowing when the S&P 500 hit 2000 may help you in a nerdy market trivia game (unless that's something only we play?), but the round number doesn't say where stocks go from here. Nor are the many pieces on the 16-year journey from 1000 to 2000 terribly instructive. Too backward-looking! So raise a glass to all-time highs and the magic of compound growth if you like, but then look forward-to the rising earnings, global growth and other fundamentals we think should drive this bull on to plenty more new highs.