Wednesday, July 23, 2014

UPDATE: All-Time Highs

by Matt Malick and Ben Atwater

The stock market has been on a tear lately and the Standard & Poor’s 500 Index is approaching the two-thousand mark.  The current bull market, which began on March 9, 2009, is both the fourth strongest and the fourth longest, rising nearly 194% in over five years.

If it seems like stocks are cracking new all-time highs on a weekly basis, well, they basically are.  Since reaching a new all-time peak on March 28, 2013, the S&P 500 has hit a new record on 21.4% of trading days – more than once a week, on average.

Since its inception in 1950, the S&P 500 has struck new all-time highs on just 6.8% of trading days. But, this long-term average includes weak markets where new highs are rarely eclipsed, such as the period from 2000 to 2013.

The roaring 90s offer an interesting point of comparison.  After attaining a new all-time peak on Valentine’s Day in 1995, the S&P 500 made new highs on 19.1% of trading days up until the tech bubble began to burst in March of 2000.  This frequency is in the ballpark of the current environment.  But, keep in mind, that equities hit new highs on almost a weekly basis for over five years, whereas the current run has lasted less than 16 months.

As the market continues its ascent, we are keeping a close eye on sentiment and valuations.  Thus far, even minor upticks in volatility have led to spikes in bearish sentiment, as measured by various survey data.  From an anecdotal perspective, the financial media, the investment industry and even clients still seem to view this market with a great deal of skepticism.  Not until investors begin to shrug off bad news and view pullbacks as “buying opportunities” have bull markets usually run their course.

And from a valuation standpoint, the S&P 500 trades for about 18 times trailing earnings per share.  While loftier than the historical average, the ninth innings of bull market runs accompany even higher multiples.

While we believe this bull market still has legs, all good things must eventually come to an end.  Therefore, to be prudent, we are continuing to rebalance client portfolios where appropriate.  This involves trimming outsized positions, adding to underperformers and realigning the mix between equities and fixed income.

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