The stock market in July has been setting new highs in the post-crash era. The S&P 500 for a time on Monday traded over 1238, the highest since mid-2001, and yesterday closed nearby that level at 1231.16. Yes, equity prices generally are still a long way from the glory days before the tech bubble burst. The close of 1527.46 set on March 24, 2000 still stands as the all-time high for the S&P 500, or roughly one-quarter higher than yesterday’s close.
Since late-2002, when the final wave of selling washed over Wall Street, stocks have been rising, albeit inconsistently, but rising nonetheless. From the post-crash low of 776.76 of October 9, 2002, the S&P 500 has climbed 58%. A tidy ascent, to be sure. But with the current bull market approaching its three-year anniversary, the question is whether this upside momentum has run its course, or still has some life left in it?
To the extent recent earnings news is a factor, the bulls have reason to cheer on second-quarter reports continue rolling in. “Earnings season is proving to be ahead of the curve, certainly better than we generally expected,” Stephen Pope, head of equity research at Cantor Fitzgerald in London, tells Bloomberg News.
Standard & Poor’s reports that estimated second quarter earnings for the S&P 500 will rise by 8.9% over the year-earlier quarter. If that proves accurate, it will be a slowdown from the 13.4% year-over-year advance in this year’s first quarter earnings from the comparable period in 2004.
But if earnings growth is slowing, perhaps as a prelude to something worse, the stock market is in no mood to worry of late. The bond market, on the other hand, still anticipates disappointment of some sort or another. Yes, yields have been on the rise in July, suggesting that the fixed-income set has been rethinking its spring rally that all but shouted out that a recession was imminent. But it’s again looking like bond investors are expecting that economic growth will stumble. Notably, the spread in junk-bond yields over the 10-year Treasury Note has shrunk to around 2.8%, its lowest since early April, as tracked by the KDP High Yield Daily Index.
The bond market was able to point to some supporting data yesterday in rationalizing a lower risk premium in debt securities. The Conference Board’s Consumer Confidence Index unexpectedly fell for July, thanks largely to rising energy prices. But there was nary a whiff of disappointment in the consumer outlook as measured by yesterday’s existing home sales numbers for June, which reported a record turnover of 7.33 million units in the housing stock. The bond market, in a sign of the times, paid no attention to the latter.
Either the bond or the stock market is wrong. But that doesn’t mean each can’t be right for a while longer. The respective factors, or illusions, that have inspired bond prices higher, and now stock prices may stick around yet. For the moment, Wall Street could hardly be more comfortable with the hazards such as they are. As such, prices for both equity and fixed-income securities can climb the wall of worry together.