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?
Check out: The Dow at 20,000 in a year is now the consensus
forecast
(http://www.marketwatch.com/story/the-dow-at-20000-in-a-year-is-now-the-consensus-forecast-2016-08-10)
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.
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. Ultimately, it was the start of an ugly
downtrend for the index -- and stocks overall.
Also read:Just like 1999? Three reasons this stock market is
different
(http://www.marketwatch.com/story/this-time-its-different-3-reasons-the-us-stock-rally-wont-stop-2016-08-12)
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 stocks 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 says the level of
quiescence in the market can be interpreted as bullish. The past
two years marks the lowest level of volatility in the S&P 500's
history, according to McClellan.
McClellan explains that low volatility, or periods of relative
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 have effectively unfurled a raft of
quantitative-easing programs that have pulled government bond
yields to historic lows, driving trillions of dollars of sovereign
paper into negative-yielding territory.
Read:Why Marc Faber is calling for an ugly stock-market
crash--again
(http://www.marketwatch.com/story/why-marc-faber-is-calling-for-an-ugly-stock-market-crashagain-2016-08-09)
On Friday, the 10-year Treasury note touched its second-lowest
yield before regaining some ground to finish at around 1.51%. The
30-year Treasury was offering a yield of 2.234% late Friday.
Those meager yields 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% 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 against the
backdrop of ultralow yields and weak earnings.
Read:Earnings beats are concealing bad results
(http://www.marketwatch.com/story/earnings-beats-are-concealing-bad-results-2016-08-05)
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 a 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.
Read: The country's top investing minds came to this depressing
conclusion about the economy
(http://www.marketwatch.com/story/why-top-investors-economists-think-the-next-year-will-be-a-slow-boat-to-nowhere-2016-08-12)
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) is set to report on
Tuesday, Target Corp.(TGT), Cisco Systems(CSCO) and Staples
lnc.(SPLS) on Wednesday, and Wal-Mart Stores Inc.(WMT) and Gap Inc.
(GPS) will report Thursday. With those quarterly results, the
earnings season comes to an unofficial close next week.
(END) Dow Jones Newswires
August 15, 2016 04:27 ET (08:27 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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