Investors have spent several months deciphering the mixed signals from the U.S. economy, and yet the S&P 500 has kept moving higher, slowly but surely, putting it just shy of the 2,000 mark.
With its Friday close, the S&P would need just a 2.5 percent gain to vault the 2K level – something most did not expect during the depths of the Great Recession.
The move has been anything but frantic. The S&P 500 has not made a 1 percent move in a single session in almost two months, and the CBOE Volatility Index, the market’s favored gauge of anxiety, fell below 11 on Friday, for its lowest close since 2007.
“That the market is going up in low volatility is good for investor sentiment,” said Doug Coté, chief market strategist at Voya Investment Management in New York.
What’s unclear is whether the market is starting to become overvalued. The forward P/E ratio of the index is now 15.8 and would rise above 16 if the index hits 2,000 and earnings estimates remain the same. However, Coté said given current low interest rates, that level would still be low.
Still, the economy notably contracted in the first quarter of this year. As always, hope of a takeoff in growth persists among equity managers, boosted on Friday by employment data showing the economy finally recouped all the jobs lost during the Great Recession. It took 77 months to do so, the longest time needed to regain jobs lost in a recession.
“The jobs report was not only strong, but also not too good, so the overheating fear is not there yet,” said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.
“It suggests we’re headed up to 2,000 (on the S&P 500) in the next weeks.”
As the market has rallied, some, including several members of the Federal Reserve, have expressed concern that investors are ignoring risks. The cost to protect against market declines, measured in the options market, has been steadily falling.
Some would call that complacency, but the lack of actual volatility is keeping option prices subdued. Realized volatility for the S&P in the last 10 days has been a bit more than 4 percent, which theoretically makes the VIX expensive, not cheap.
“A lot of people who hedged their bets by buying volatility, many did it in the 13 and 13.5 area (on the VIX), so they don’t feel a need to readjust their hedges,” said J.J. Kinahan, chief derivatives officer at TD Ameritrade in Chicago.
The round 2,000 print will scare some, while others will have no option but to buy in as they chase performance. Paulsen is expecting a slide in stocks in the second half of the year.
“But right now people are more concerned about getting in before it goes up more, rather than waiting for a correction,” he said.
Source : Reuters