Earnings-day blow-ups, leverage warnings in China, Apple’s worst rout since August. Oh, and a sixth straight week of gains for the S&P 500.
No matter what happens lately, stocks just keep rising, with record closes piling up in US benchmarks at a rate that is starting to defy precedent. The Nasdaq 100 Index has finished at all-time highs 62 different times this year, on par with the most ever in 1999, while the S&P 500 and Dow Jones Industrial Average are closing in on history, too.
For bears, the elongating list of highs bespeaks euphoria, particularly when the market has been spared a 3 per cent pullback for more than a year. Investors have ignored bad news ranging from North Korea to political drama at the White House to what may be the biggest profit slowdown in six years.
On the other hand, bailing out just because stocks are at a record is a poor excuse for a trade. The S&P 500 has produced 49 fresh highs this year, an annual rate that’s been surpassed five times since 1946. In all but one previous instance, stocks kept going up the next year, notching 20 additional highs on average, data compiled by Bloomberg show.
“I find the number of highs is irrelevant. What matters to me is the duration of a recovery,” said Christian Ledoux, director of equity research at South Texas Money Management Ltd., which oversees $3.3 billion in San Antonio, Texas. “Unless you think earnings are going to slow down or go negative, I wouldn’t stay away from stocks.”
For the week, the S&P 500 climbed 0.9 per cent to 2,575.21, capping its longest streak of gains since the first quarter. The Dow average added 457 points to 23,328.63.63, led by IBM, UnitedHealth Group and Travelers Cos. The Nasdaq 100 rose 0.3 per cent to 6,108.82.
The Dow has made 53 records since January, poised for the most since 1995. In the week just ended, the measure crossed the 23,000 level for the first time ever — the sixth 1,000-point milestone reached in the past 12 months.
And yet in and of itself that’s not ominous. In fact, buying stocks when the S&P 500 hit a record has proved profitable as momentum builds. Since 1946, the S&P 500 has spent some part of 38 calendar years at levels that exceeded any past peak, or 53 per cent of the total. Twelve months after closing at one, the index’s return has been positive 72 per cent of the time.
Even the Nasdaq 100’s streak of records look less impressive relative to the 1990s, at least through a wider lens. After first getting to a record in 2015, a total of 80 highs have been made in the index since. That pales in comparison to the heyday of the internet frenzy. Back then, as the tech-heavy gauge enjoyed 12 straight years of gains, it hit 341 different records along the way.
What about valuation? At Friday’s close, the S&P 500 traded at 19.5 times forecast earnings, the highest since the dot-com era. It represents an earnings yield of 5.1 per cent, more than double the payout from 10-year Treasury bonds.
Investors, shunning stocks during most of the 8 1/2-year bull market, have started to warm up to the rally. They added $8.4 billion to US equity funds during the week through Oct. 18, the first back-to-back inflows since March, data compiled by EPFR Global show.
While third-quarter profit growth is forecast to drop to 2.6 per cent for S&P 500 companies from around 10 per cent in the first half, analysts see a rebound in coming quarters as the damage from the hurricanes dissipates.
Corporate America is riding on a concerted economic recovery worldwide and President Donald Trump’s proposed tax cuts are poised to give it another boost, according to Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, who helps oversee $35 billion.
“The tax reform would help to drive activity,” McCain said by phone. “For example, giving businesses less incentive to move overseas could in fact help provide another leg to the overall economic and earnings that has powered the market over the last years.”