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The S&P 500 was on track Monday for what would be its 26th record close of 2017, but there are conflicting opinions as to whether it’s bullish.
In a Monday note, Sam Stovall, chief investment strategist at CFRA, said that new highs should not be cheered rather than feared.
When it comes to tallying new highs, if the index failed to notch any more record closes, 2017 would rank 20th since World War II. On an annualized basis, 2017 would still rank below 1995 (77 new highs), 1964 (62), 2014 (53) and 1961 (52), Stovall said
The benchmark index SPX, +0.10% has posted a record close 151 times so far during the latest cyclical bull market, which is about half of the number of all-time highs during the 1990-2000 cycle, according to Stovall, who said the high number of all-time highs is not an indication of future disappointments.
“The S&P 500’s 25th new all-time high serves as a confirmation of investor confidence that the economy and corporate earnings will continue to improve, while inflation and interest rates remain subdued,” Stovall said.
It is difficult to say whether the confidence is about fundamentals, however.
The economy is not expected to grow too much above the 2% rate it had grown over the past nine years, according to forecasts by economists polled by MarketWatch. Behavioral finance experts would say that the increase in asset prices can feed on investor optimism even if it’s not fully supported by fundamentals.
Whether based on fundamentals or asset prices themselves, the confidence in the stock market is still intact, judging by the fact that the rally is broad-based.
Such a rare trifecta happens only in about 2% of all trading days, and Friday’s event was the first since March 1, according to Bespoke Investment Group.
But forward returns after such a “triple play,” suggest that there is no reason to celebrate, as short-term returns are not that different from average days, according to data compiled by Bespoke.
“While the average forward returns following the “triple play” of 52-week highs are indeed higher than the average forward returns for all periods, they’re only slightly higher,” said the report from Bespoke Investment Group.
Analysts at Bespoke looked at one-day, one-week, one-month and three-month returns following “triple play” sessions and saw that average returns were marginally higher, with positive returns more than half of the time.
“While the new highs across the board are impressive and an indication that the market’s uptrend is solidly intact, based on prior returns after the same thing has happened in the past, it shouldn’t be viewed by itself as a buy signal,” said Bespoke.
As the stock market climbs to new highs, valuations are also rising. Indeed price-to-earnings ratio of the S&P 500 based on 12-month forward earnings at 17.6 is at the highest levels since 2004, according to FactSet.
P/E ratios are not good at identifying market tops of bottoms, however, they are associated with below-average long-term returns.