We wrote about the new record high for the S&P 500 Index Wednesday . This is such a big market event we wanted to share some additional thoughts—10 of them in fact—on this market milestone:
The new high secured March 9, 2019, as the 10th anniversary of the bull market. If the S&P 500 hadn’t made a new high before the next bear market, this bull would have ended short of the 10-year mark.
Don’t fear new highs. Historically, buying stocks at all-time highs has been productive over the long term, as shown in the LPL Chart of the Day. Going back to 1950, the average 12-month gain from a new high for the S&P 500 has been 9.8%, excluding dividends.
When new highs have been more than six months apart, as the last two were, average gains in the S&P 500 historically have been about 12% in the 12 months after the new record.
For those worried that a new high means sub-par long-term returns, consider that the average 5-year annualized gain in the S&P 500 from all-time highs is 9%. For 10 years, it’s a still solid 7.4% (excluding dividends).
History has shown stocks’ strong start to the year could mean further gains down the road. The average rest-of-year gain for the S&P 500 after a double-digit first quarter rally has been 6%.
Global growth is supportive. Owning stocks when economic conditions are improving, as they are in the United States and China in particular, tends to be rewarding.
We don’t think stocks are overvalued. The S&P 500 price-to-earnings ratio (PE) based on consensus analysts’ estimates for the next 12 months is 16.7, very reasonable considering low interest rates and inflation.
Not all the possible good news is priced in. Investors may get more than they expect out of the U.S.-China trade deal, which could boost business confidence and capital investment.
Earnings may be a positive catalyst. First-quarter earnings season is off to a good start overall, and we think 2019 expectations are too low.
Sentiment is not overly bullish. Just 33.5% of individual investors are bullish, according to the American Association of Individual Investors. Other sentiment measures we follow are far from euphoric.
Looking ahead, we believe there are enough potential positive catalysts to propel the S&P 500 to our year-end fair value target of 3,000 this year. At the same time, we acknowledge the risks, particularly overseas—Europe faces structural challenges, lackluster growth, and upcoming Brexit hurdles. The possibility of a pickup in volatility against a favorable fundamental backdrop supports our recommended market weight equities allocation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
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