Market Analysis

About That Magic Number

Bullish or bearish, new record highs hold no predictive value.

It seems as though many are hyper-focused on 1565. What’s 1565 you ask? Simple, it’s the level reached by the S&P 500 Price Index on October 9, 2007—the highest point in its history. Most discussion seems to focus on what this means for the period ahead: Are we in a bubble; is it the Fed; is it strong “resistance” (technical analysis lingo); does it mean (gasp) bad times loom?

So what does the supposed milestone mean? Nothing.

There is zero predictive quality to the level of one version of one index. The upward-and-to-the-right historical sweep of the S&P 500 since inception should show that new highs are just a milepost along the long journey investing actually is. They aren’t relevant to market direction in the short or more significantly, long term.

Consider the 1982-1987 bull market in which the same S&P 500 Price Index set 155 new closing highs—and surpassed 200 and 300 for the first time (we’ve come a long way since).i The 1990s bull market began on October 12, 1990 at an opening S&P 500 price level of 295.46. It ended March 24, 2000 at 1,527.46—how many hundreds of new closing highs must’ve been set along the course?ii The bull beginning in 1956 broke through the prior high in September 1958—and lasted more than three years beyond. Selling for fear of a bear market for no other reason than reaching new highs is a behavioral flaw. (Those who wish to argue this bull market is fundamentally different and weaker than those preceding it should read our commentary on The Street.)

But if a new high isn’t necessarily bearish, is it necessarily bullish? Answer: No.

Following the incredibly powerful bear market that began in 1929, the S&P 500 Price Index didn’t reach a new price high before 1937—when a new bear market began. Other bull markets have barely exceeded prior highs—like the bull beginning in 2002 that ended in 2007 a smidge into record territory (for the S&P 500 Price Index), which was, in our view, truncated by a sequence of government missteps. Simply, a new high isn’t a bullish signal either. It’s a number—and a very arbitrary number at that. In our view, with the economy continuing to grow, still-skeptical sentiment (as the whole too-high hullabaloo illustrates) and much more, there’s little reason to resort to justifying a bullish stance by relying on such arbitrary and random figures with little to no predictive weight.

But it isn’t just the number that’s arbitrary—index selection is too. After all, the S&P 500 Price Index excludes the impact of dividends. But nearly any diversified equity portfolio experiences dividends in some way, shape, form or measure. Hence, the total return is more telling, and the S&P 500 Total Return has been at new highs for months—with almost no one noticing.

But then, why fixate solely on domestic markets? What about foreign? If we looked, we’re betting we could identify some bull market in some corner of the globe that’s well into record territory. No, that’s not truly telling either, bringing up a further point—those fixating on 1565 as if it were a magic number miss the fact that in the last bull market, foreign, and particularly Emerging Markets stocks, widely outperformed domestic, moving much further past the prior high than the S&P did (performance leadership rotates frequently).

As we approach 1565, expect hyperbole from the bullish and bearish, but let’s remember it for what it actually was: The year the Spanish founded St. Augustine, Florida.

i Source: Global Financial Data, Inc., accessed on 2/15/2013.

ii Ibid.

