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 13, 2016 10:45 ET (14:45 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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