Let’s just assume for a moment that the Standard & Poor’s 500 index will reach 2014 before too long — that this unyielding bull market, which has rejected so many good excuses to falter, will claim for itself the theatrical moment of clicking over to 2014 in the year 2014.
This is hardly a courageous call, given the index is at 1,981 (down from another record closing high of 1,987.98 Thursday), less than 2% from that mark. Sure, no upside target, no matter how near, is ever promised to investors. And the market’s internal gears have been grinding on this recent stretch to fresh highs on the strength of a narrow cluster of stocks, hinting at fatigue and uneven performance in the short term.
But failing to make 2,014 would, at this point, be more surprising than getting there.
The 2,014 level was a cutesy year-end 2014 target set in December by a couple of Wall Street strategists, representing a respectable 9% gain after last year’s 30% surge. If and when the S&P benchmark does get there, it will mostly be greeted by market wags and headline writers as an arbitrary bit of numerical symmetry. Yet, mostly by coincidence, the 2014 level also sits at a threshold of some consequence, representing exactly a 50% gain from the point in late 2012 when the stock market embarked upon its “liftoff phase.”
From post-crisis fear to growth-minded greed
This is what I’m calling the period, still underway, when the mood tipped from post-crisis fear toward growth-minded greed, when investors began paying ever more generously for each dollar of corporate profits, when the sheer level of central-bank commitment to easy money persuaded financial players that calamity risk was suppressed and market volatility smothered. This was when the "era of uncertainty" finally drew to a close, as suggested here at the time.
We can even point to an exact date when the bull market truly started acting like one: Nov. 16, 2012. On that day, the S&P 500 made a midday low of 1,343, marking an 8% loss in the prior month amid the noise of President Obama’s re-election and exhausting drama over the “fiscal cliff” tax-code expiration fight it would produce.
Should the S&P 500 hit 2,014, it will mean the U.S. stock market is precisely half-again as valuable as it was 20 months ago – a good occasion to reflect, and assess whether the drivers and character of the market over this run remain in place, or are giving way to another, less generous backdrop.
Consider further evidence that the character of the market turned on or around that date:
-That’s when the stock valuations began to levitate with investor confidence and risk appetites, as shares took to rising well in excess of underlying company earnings growth. Over the prior three years, the rebound in earnings outpaced market appreciation, a sign of residual caution and stinginess among crisis-raw investors.
Doug Ramsey, chief investment officer at Minneapolis asset manager and market research firm Leuthold Group, notes that, since the November 2012 low, two-thirds of the market gains have come from higher price-to-earnings multiples and one-third from higher corporate profits. The median stock in Leuthold’s 3,000-stock universe has gone from 16.8-times prior year’s earnings in November 2012 to 22-times today.
-The market’s low on Nov. 16, 2012, came the same day the yield on the 10-year U.S. Treasury note made a decisive low of 1.57%, in a clenching up of economic-growth anxiety, fiscal policy confusion and the fresh memory of global market scares.
-The fall of 2012 was when investors bought into European Central Bank Chairman Mario Draghi’s pledge to do “whatever it takes” to support the Euro economy, and when the Federal Reserve’s open-ended $85 billion-per-month asset-purchase program known as QE3 was launched.
This program, now in wind-down mode, seemed the one that persuaded equity and credit investors that the downside in risk markets was cushioned, the Fed prepared to err on the side of more help versus not enough.
This “liftoff phase” in stocks has only been as strong as it has because of true and substantial strengthening in core economic performance. By November 2012, the unemployment rate was stuck for months between 7.8% and 8%, before it began sliding steeply toward today’s 6.1%.
A central bank firmly and convincingly committed to stimulative policy was administering strong help to an economy that decreasingly seemed to need it – a magical combination for financial assets. The important question now is whether this happy heads-I-win-tails-you-lose setup is reverting to a less forgiving arrangement.
Morgan Stanley strategist Adam Parker was first to set a 2,014 year-ahead target for the S&P 500 in late 2013, which made him the most bullish on the Street at the time. He’s now targeting a bit more upside to 2,050 in the coming 12 months, but says that, for the second half of 2014, “the risk-reward is more balanced.”
The post-November 2012 backdrop has been one where “good news is good and bad news is good,” because of that perceived unwavering Fed support in the event growth stumbles.
Now – with the QE3 being sunset soon, stocks a good deal more expensive and the consensus expectations for U.S. growth becoming quite optimistic – Parker thinks “bad news will now be bad” and further upside will not be so effortless.
As a hint of this possible new orientation, he points out that companies that have fallen short of earnings expectations this quarter have had their shares punished far more dramatically than profit overachievers are being rewarded by the market. (See Amazon.com [AMZN] getting pounded on Friday by 10% for subpar results, while Facebook Inc. [FB] – with a flawless, stunning profit performance – added just 6%.) Broader downside risk to earnings in coming months would not be treated gently.
There remains a dream scenario for a continued upside overshoot, of course, contingent upon that now-expected growth acceleration, with inflation problems remote enough to keep Fed-set short interest rates at zero. Long-term yields would lift and steepen the yield curve, liquidity would stay strong, the 2,014 index level would be left in the dust and stock multiples could keep climbing, Parker says. Meantime, the corporate mergers-and-acquisitions party would rage even harder.
This can’t be ruled out, but Parker doesn’t see it as having a high enough probability to bank on.
While we’re talking index-and-year number quirks, Doug Ramsey points out that the last time a major index climbed across a level that was also the year number was when the Dow Jones Industrial Average crossed 1987 in January of 1987. It would, of course, crash through the level that October.
This is just a fun fact and not meant as a foreboding prediction that an ’87-like collapse is ahead. (Unless we do get a crash, in which case that’s exactly what this is.)