This is a peak. The 131 S&P 500 record highs in this cycle were not peaks. Photo by Claude-Olivier Marti/Getty Images.
Stocks have quietly set a string of new all-time highs in recent weeks.
That word—quietly—is a testament to today’s sentiment. Today, investors seem more accepting of record highs. This differs markedly from the noisy acrophobia that coincided with earlier “milestones”—those claiming stocks were bubblicious, inflated, disconnected from reality, too-high-and-must-fall-soon. While the fears may have faded, we don’t see many cheers, either. In our view, the lack of celebration around recent all-time highs suggests the current all-time highs don’t equal this bull market’s peak. In our view, recent all-time highs aren’t a call to action at all—the very same lesson of the 131 we’ve seen earlier in this bull.
The S&P 500 took about three years after the bull started on March 9, 2009 to hit the first new all-time high. (Exhibit 1) Not that most even noticed! Perhaps because most investors don’t track the S&P 500 Total Return Index—instead focusing on the price-only version, despite the fact diversified equity investors experience something more like total returns. Pessimism also blinded many to the brightening reality. You can see this in the reaction when the more widely watched price index started setting new records in March 2013. Speaking for many, one analyst said: “We've gotten up this high too quickly...” Another claimed: “The Dow’s record high feels ‘eerily similar’ to the market’s peak in mid-2007 before the global financial crisis.” Or another: “The underlying economy does not justify the level of the stock market we’re enjoying today.” These were not isolated reactions; these were the norm. As time progressed, the market didn’t crash and instead churned higher still, and pessimism gradually gave way to skepticism.
Skepticism is now evolving toward optimism. Acrophobia (fear of heights[i]) is less common these days. Fewer headlines fret high heights. Instead, people appear to accept the latest record high and move on. But no one we can find is dancing an all-time high jig with each zig to a new record level—suggesting we’re still nowhere near euphoria. Few if any claim recent record highs signal more upside ahead (like they did during the very late 90s even as underlying fundamentals deteriorated—right before the 2000 tech bubble popped). Most forecasters aren’t projecting pie-in-the-sky high returns. Valuations—a signpost of sentiment—aren’t inflated. US and global market 12-month forward price-to-earnings ratios (P/Es) are 16.0 and 15.4, respectively—far below the heady days of 2000. In fact, S&P 500 forward 12-month P/Es were above 20 for most of the period from mid-1997 through 2000. The bull market ended March 24, 2000, P/Es of 26.9 and 26.8 for the S&P 500 and MSCI World, respectively.[ii]
Exhibit 1: S&P 500 Total Return Index New All-Time Highs and Headlines
Source: FactSet, as of 11/24/2014. S&P 500 Total Return Index, 3/9/2009 – 11/21/2014. Headlines, in chronological order, are here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here and here.
Since that first yellow diamond in Exhibit 1, the S&P 500 Total Return Index has gone on to hit 130 more. The MSCI World Total Return Index has set 65 records and currently sits within 0.9% of setting another.[iii] Since logging that first high, the S&P 500 is up 53.9%.
That is a big number. But some might not be cheering. Why? Many investors still haven’t bought into this bull fully: staying out of stocks; keeping extra investible cash for fear of a 2008 redux; or getting in … and out. [iv] Even folks who consider themselves disciplined may have succumbed after markets started hitting one all-time high after the next in early 2013, worried the air was thin at those “high heights.” The news largely reinforced those worries, with all the bubble brouhaha. Let’s say hypothetically you decided to “play it safe” and sold after the 25th all-time high. Forty percentage points of growth is a lot to leave on the table. (Exhibit 2)
Exhibit 2: S&P 500 Total Returns After Record Highs Attained, Current Bull Market
Source: FactSet, as of 11/24/2014. S&P 500 Total Returns and hypothetical value on 11/21/2014 of $100,000 invested on the date indicated.
Ignoring the noisy chatter about stocks being too high was the right move. All-time highs aren’t predictive—index levels, round numbers and records reflect past market movement, which never dictates future returns. They’re just a thing—another notch stocks hit as markets continue to climb higher.
At some point we will see this bull’s last all-time high. But that typically happens when the skeptics have capitulated, casting their doubts aside for fear of missing out on gains. That sentiment—euphoria—isn’t here today. Which, combined with a growing global economy and a favorable political backdrop, is the recipe for record highs.
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[i] This is not agrizoophobia or ablutophobia, which are the fear of wild animals and the fear of bathing, respectively. It could be altophobia.
[ii] FactSet, as of 11/24/2014. 12/31/1996 – 11/21/2014.
[iii] FactSet, as of 11/24/2014. MSCI World Total Return Index, 7/3/2014 – 11/24/2014.
[iv] And, potentially, in and out. And in and out. You get the point, a lot of folks flip-flop to their own detriment, unfortunately.