Last Thursday was a historical day for market watchers.
The bellwether S&P 500 index closed above 4,000 points for the first time (at 4,019), hitting a new high even amid bubbling inflation worries and rising Treasury yields. On Monday, the index closed at 4,078, another record.
And though some investors may be looking at the overall picture with some trepidation over whether stocks can go higher from here (not to mention the many reasons why the S&P 500 at 4,000 strikes some as overvalued), those like Mark Haefele, chief investment officer at UBS Global Wealth Management, argue investors “should not fear entering the market at all-time highs.”
He concedes investors may worry that the gains are unsustainable, “particularly given the 80-basis-point rally in 10-year US Treasury yields this year that has prompted bouts of market volatility,” he wrote in a Monday note, “But history suggests investors need not be concerned by record highs.”
One big reason for that? Stocks hitting new highs historically doesn’t preclude them from further gains. “Based on data going back to 1960, stocks have performed slightly better than average after hitting all-time highs,” Haefele wrote. “Our analysis shows that after reaching a fresh high, stocks rose another 11.7% in the following 12 months, compared with 11.3% from levels below record highs.”
Meanwhile, UBS’s Haefele notes that rising yields and rising stock prices don’t always work against each other: In fact, he writes that in the past 25 years, there have been “10 periods in which the US 10-year bond yield has risen by more than 100 [basis points]. And in all instances, global equities delivered flat or positive returns,” he notes.
With a vaccine-led economic recovery underway, UBS’s Haefele still sees more upside in cyclical and small- and mid-cap stocks versus large caps and growth.
Yet there are plenty of warnings signs out there, too. For one, the Buffett Indicator, a ratio named after famed value investor Warren Buffett that measures the total value of the stock market versus the nation’s economic output (GDP), is at astronomical levels. That could indicate an impending pullback. The S&P 500, meanwhile, is also trading at historically expensive levels, per FactSet.
If stocks do trek higher longer-term, that doesn’t mean it will be calm waters in the short term. Some strategists like Ally Invest’s Lindsey Bell argue that “volatility is going to be probably here to stay for the next month or two while investors kind of digest this new environment that we’re working with, which is higher interest rates and potentially higher inflation,” Bell recently told Fortune. But overall, “I think the picture still looks really good for 2021,” she said.
