News Column

Chicago Tribune Gail MarksJarvis column

August 27, 2014

By Gail MarksJarvis, Chicago Tribune



Aug. 27--The Standard & Poor's 500 index, the most commonly used representation of the stock market, made history Tuesday as it crossed over the 2,000 mark and closed at 2,000.02.

In a reminder that even the most terrifying periods in the stock market eventually heal and are replaced by periods of delectable gains, the S&P 500 has climbed 195.6 percent since early 2009. That's when the worst bear market since the Great Depression ended after about 11/2 years of collapsing financial companies and severe recession.

This year, as the economy continues to recover from those scars, the index, made up of 500 large U.S. stocks, has climbed 8.2 percent. That's on top of last year's 30 percent gain.

But does Tuesday's historic 2,000 stock market milestone matter?

In a sense it matters because the all-time high of Tuesday will be tracked by market historians and analysts calibrating the direction of stocks from this day forward. But that doesn't mean 2,000, and the gains the S&P 500 has plopped into 401(k) plans and other accounts over the last 5 1/2 years, are for keeps.

"It's certainly a milestone," said BMO Private Bank chief investment officer Jack Ablin. "It falls somewhere between a graduation and a birthday."

In other words, while a 21st birthday may matter to a teenager looking forward to passage into adulthood, at age 40 it probably means little. Ablin notes that the last major milestone for the S&P 500 came in February 1998, when the index hit 1,000.

The chances are you don't remember it. Yet for those who celebrated the milestone in 1998, a valuable lesson followed a couple of years later: Milestones aren't promises for the future.

While the S&P hit the 1,000 mark in 1998 and climbed 27 percent that year and 19.5 percent the next amid investor infatuation with Internet stocks, the index plunged below the 1,000 level in September 2001 and again in summer 2002 as investors discovered how foolish they'd been investing in excessively pricey tech stocks. The index began a 49 percent decline in early 2000.

Then, after recovering from that trauma and delighting investors in the mid-2000s, the S&P 500 again fell below 1,000 in November 2008. That's when the financial crisis put the U.S. economy into a severe recession and left investors in the S&P 500 index with about a 57 percent loss as it hit 676 in March 2009.

The S&P 500's new record undoubtedly will be soothing to investors. Momentum, or stocks being carried higher day after day, tends to cheer investors and tempt them to buy more stocks.

But momentum is no guarantee. Stock markets tend to go through corrections, or downturns ranging from 10 to 20 percent, about once a year when overoptimism has carried stocks to prices that are extreme and need to come down a bit, or "correct." Bear markets, which on average inflict losses of 35 percent, happen about every four years on average -- usually when the economy is going through a recession.

Since the old pros in the market know milestones alone mean little, they start looking over their shoulders for risks when the stock market is providing happy days continually.

Ned Davis Research analyst Neil Leeson warned clients this week that the recent trend "is almost too strong."

"Trend strength can be looked at as another sign of extreme optimism, and could be a warning for those arriving late to the party to be cautious," he said.

That doesn't mean he's expecting any severe losses for investors.

Further, analysts don't see the outrageous valuations on stocks now that prompted the tech wreck. In early 1998, the price of S&P 500 stocks was about 23 times the earnings companies were expected to produce over the next 12 months. Stocks now are somewhat pricey at 15.5 times expected earnings, but they are not severely expensive compared with a 10-year average price of 14 times earnings.

Investors in early July became concerned about sectors of the market that seemed excessively pricey, particularly small-company stocks and biotechnology.

That squeamishness, combined with geopolitical concerns about Ukraine and the Middle East, caused stocks to drop about 4 percent. But recently those losses have been overcome by comforting words from Federal Reserve Chair Janet Yellen and her counterpart in Europe, Mario Draghi. Both seem committed to providing stimulus to help the economy in its recovery. That stimulus, in the form of ultralow interest rates, is a signal to investors to buy stocks rather than bonds paying so little interest.

"Investors appear to be recommitting to equities" after some nervousness in July over pricey stocks and geopolitical risks, said BlackRock Chief Investment Strategist Russ Koesterich. In the short term, he said, the riskiest place for investors might be "safe haven" assets like shorter-term U.S. Treasurys and gold.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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(c)2014 the Chicago Tribune

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Source: Chicago Tribune (IL)


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