S&P 500 hits 50 records this year

S&P Records
S&P Records

The S&P 500 has hit 50 records this year. This marks a big milestone in the stock market. With the market up 24%, some forecasters predict even greater heights ahead.

But should we be excited or concerned?

According to Deutsche Bank Research, the S&P 500’s CAPE ratio has only been higher twice in the last 100 years. The CAPE ratio is often used to determine if a market is overvalued.

This data has investors looking at historical examples to understand potential market movements. Macro strategist Henry Allen reflects on three other times when market valuations were very high. One well-known period is the dotcom boom of the late 1990s.

During this time, the S&P 500 more than tripled over five years. But then it entered a long correction phase. It posted three yearly declines in a row for the first time since World War II.

Like the dotcom era, the current market is driven by a small group of tech stocks. It has also seen big gains. This leads to worries about potential volatility.

The second historical reference is the 2007-2008 financial crisis. Before the crisis hit, markets were strong with low volatility and tight credit spreads. This is similar to today’s conditions.

However, the crisis led to major economic distress and market downturns. It showed how quickly conditions can change from stable to turbulent. The third comparison is the market response to the COVID-19 pandemic in 2020.

Markets rebounded a lot in 2021 due to extensive monetary and fiscal stimulus.

Market milestones and inflation trends

This led to stretched valuations.

The rally was followed by a huge selloff in 2022. The S&P 500 fell 25% from its peak. Henry Allen notes that, in all these cases, there was limited potential for further gains.

This was due to already high valuations. Each was followed by a big correction. Today’s market shows similar traits.

These include a “bubble mindset” and strong optimism that good times will continue. For example, in 2000, there were predictions of the U.S. paying down its entire national debt. In the mid-2000s, before the financial crisis, the era was called the “Great Moderation.” This indicated perceived macroeconomic stability.

Recent economic responses to the COVID-19 pandemic have shown a similar skepticism about worsening inflation. Economist Douglas Porter from BMO Capital Markets points out that inflation remains a concern. This is particularly true in Alberta, where it hit 3% in October.

The national average was 2%. Alberta’s strong housing market and broad price increases across various sectors have contributed to higher inflation. Core inflation, excluding volatile components, is also trending higher in the province, at 3.3%.

Porter argues that high inflation could be a sign of economic success. This is given Alberta’s strong performance in GDP, employment, and population growth. The S&P 500’s record-breaking performance this year is a double-edged sword.

It suggests big gains but also raises concerns about future corrections. Historical examples indicate that high valuations often lead to market corrections. Investors should be cautious and aware of potential volatility, even as they enjoy the current gains.

Harper Johnson

Harper Johnson stands at the forefront of digital marketing, where she dissects and interprets the impact of online advertising trends, social media dynamics, and search engine algorithms on consumer behavior.

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