Momentum failed high-end S&P 500 in the course of making history

Photographer: Griselda San Martin / Bloomberg

The previously unstoppable S&P 500 stumbles upon the door of history, stopping its momentum at the crash of a whole. As the step slows down, the past may provide some clues.

While the benchmark index came out another positive week, its sixth in seven, there was evidence of a temper in trading spirits, with the index twice threatening to close at a record high before falling back. In the five sessions, the volume in US equities is noticeably lower, and the S&P 500 managed to place three down-days there, which has not happened since June.

Market history is generally stock-friendly when it leaves markets – meetings usually pick up speed and get stronger from there. However, two exceptions stand out, which may have significance in explaining the recent lethargy: 2000 and 1957. Both years, stockpiles have made major comebacks of intestinal loss, amid a backdrop of extensive ratings. Both times the win did not last.

Like anyone looking at equities, increased valuations are a calling card of this comeback, even with the S&P 500 coming in north at 26 times a year. Price-to-earnings ratios that are high are unusual at this stage of a bear market recovery period – and that gives some strategists a break as they think about the future.

“The fact that S&P 500 ratings are currently so much higher than at any similar breakout convinces us that this is a higher risk of ‘hunting’ than any previous specimen,” wrote Doug Ramsey, chief investor at Leuthold Group, in a statement. note. “Any break above this height will be underwelling, if not a potentially historic ‘trap’.”

The S&P 500 added 0.6% over five days. It appeared above its Feb. 19 week, closing twice a week, although ended 0.4% sadly. The Nasdaq 100 added 0.2%, while the Russell 2000 index of smaller companies increased 0.6%. The Dow Jones Industrial Average performed better, rising 1.8%.

For now, an upward trend of five months in the S&P 500 has remained intact. But this week’s price action is a sign that gains may now come harder, as they did in the two similar examples beforehand.

During the bear market of 1956-1957, the S&P 500 originally jumped back to within 1% of its previous peak, only to fall another 20% before the final bottom settled three months later. When the dot-com crash happened in 2000, an early decline was followed by an almost complete recovery in early September. Again, that bounce did not stop and gave way to a plunge that eventually wiped out half of the total value of the market.

Of course, these cases differ in important ways from now on, in particular monetary policy. But they also share two key attributes that draw a striking parallel. First, much like today, both followed a powerful rally. Their previous bull markets were the only ones in history where the total revenue of the S&P 500 was more than 450%.

Second, valuations were disputed. In July 1957, when the S&P 500 was about to break out, its cyclically-adjusted price-to-earnings ratio was a third above its 50-year average. The premium, at 140% in September 2000, is now almost 50%, according to data compiled by Robert Shiller, a professor at Yale University.

“When the recession is over, I can see that the S&P 500 is higher than it is today, but in principle I think it is fully priced at this point,” said Byron Wien, vice chairman of the works council for private solutions. wealth for Blackstone Group Inc. in an interview on Bloomberg Television and Radio. “We are growing slowly. We are about a quarter of the way back to where we were in 2019. But we have a long way to go. ”

By counting Leuthold, the market is already in uncharted waters. Rather than tracking stocks day in and day out, Leuthold keeps scoring on a monthly basis. In doing so, the S&P 500 missed the preceding month-end bull market peak only while making a complete dent in the process. Such an outbreak has occurred 10 other times since 1957; no one came up with a higher price-income multiple than now.

To Michael Shaoul, CEO of Marketfield Asset Management LLC., The rapid turnaround and persistent leadership of tech through this year’s ups and downs left the March selloff as an interruption to the bubble market that began in 2009. The urge of global policymakers to combat the pandemic could cause stock bubbles like one in the late 1980s and another in the internet boom about 10 years later, he warned.

“Under current circumstances, the chances of central banks ‘third time happy’ seem to be at a distance,” Shaoul said. “We increasingly believe that we are on the way to some form of ‘bubble problem’.”

In addition to appreciation, another contour of the recovery period that is sowing fear among strategists is the volatility, the often observed fact that a small core of megacap technology supplies record virtually every profit. As so much of the market returns in such a few stocks, it creates pressure on fund managers to own them, and increase the threat of what analysts call “concentration risk,” everyone should take bail at the same time.

Although the timing of settlement is impossible to predict, the risk is great. Bank of America strategists led by Savita Subramanian found that money managers cherish the S&P 500 more than in seven years.

To be sure, stocks may continue to rise. And a strategy to buy shares at the point of a full recovery period of the bear market has recorded gains in all but one of 12 instances. On average, the S&P 500 advanced 4.5% over the next six months.