S&P; 500 Hits New High, but Suspicion Dogs Wall Street
One of the stock market’s most closely watched indexes lurched to a record high on Tuesday, but nervous analysts--fearful another market selloff is looming--had little trouble containing their elation.
The Standard & Poor’s Corp. index of 500 mostly blue-chip stocks rose 0.90 point to 482.55, finally topping the previous peak of 482.00 set on Feb. 2, 1994.
The S&P; 500 thus managed to beat the better-known Dow Jones industrial average to a new high. Both indexes have been rising steadily since mid-December, but the Dow faltered in late January.
Even so, the Dow--up 4.04 points to 3,958.25 on Tuesday--is just 20 points shy of its own record 3,978.36 set on Jan. 31 of last year, just before the Federal Reserve Board’s decision to tighten credit set off the broadest stock market decline since 1990.
The relatively quick recoveries of the S&P; 500 and Dow indexes from last year’s selloff have caught many analysts by surprise. Few believed the stock market could rebound this far this fast, especially with interest rates two to three percentage points above their year-ago levels.
Indeed, the idea that this rally is somehow a “fakeout”--designed to suck in unwary investors before another deep market slide--remains a common theme on Wall Street. “I think this is the tail end of the current rally phase,” warns Gregory Nie, a market “technician” at Kemper Securities in Chicago.
Another sign of widespread suspicion: Investment newsletter writers polled weekly by Investors Intelligence of New Rochelle, N.Y., have grown increasingly bearish on stocks in recent weeks as the S&P; index has flirted with new highs.
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As of last week, 47.1% of the newsletter writers were bearish, up from 43.9% three weeks earlier. Only 37.8% were bullish in last week’s poll. The remaining 15.1% aren’t outright bearish, but expect at least a short-term pullback in stocks.
Naturally, Wall Street’s minority of optimists believes that the general reluctance to view a new S&P; 500 high as a sign of a resurging bull market is in itself a bullish sign. The market often fools the majority, so the greater the disbelief, the more likely stocks are to surprise investors by continuing to rise--or so the thinking goes.
But the U.S. stock market also has had fundamental reasons to feel better, some analysts note. Long-term bond yields have been sliding for nearly three months, signaling growing faith that interest rates may have peaked and that the economy is cooling to a sustainable growth pace.
In addition, corporate earnings growth has remained strong, underpinning stock prices. And in the wake of Mexico’s peso crisis and the subsequent sharp declines in its stock market and those of other Third World nations over the past two months, some investors have been pulling money out of foreign stocks and bringing those dollars back to the perceived safer haven of U.S. stocks.
The U.S. market as a whole, however, hasn’t benefited evenly from those positive trends. The Russell 2000 index of smaller stocks, for example, slipped 0.29 point to 255.24 on Tuesday, and remains 5.8% below its 1994 peak of 271.08.
Why is the S&P; 500 index leading the market? Analysts note that the S&P; is a “market capitalization-weighted” index, meaning that the stocks that have the largest capitalizations (share price times shares outstanding) have the greatest effect in pushing the index up or down.
Investors seeking relative safety naturally gravitate toward the biggest and most widely owned blue-chip stocks--classic “growth” companies such as Philip Morris, Coca-Cola and Walt Disney. While some of those stocks fell out of favor in 1992 and 1993 as investors chased industrial issues whose fortunes were tied to the recovering economy, the growth companies began to attract renewed investor buying in mid-1994.
Since last fall in particular, the rush into classic growth stocks has been the primary driver of the S&P; index. Though it contains 500 stocks, “The S&P; is really dependent on the moves of its top 30 to 50 stocks,” says Richard McCabe, market technician at Merrill Lynch & Co. in New York.
Because he views the S&P;’s recent advance as narrow in scope, McCabe counts himself a bear on the market as a whole. It’s simply not healthy to have the S&P; index hitting a new high on a day when only 60 of the New York Stock Exchange’s 3,000 stocks also are at new highs, he says.
If the bears are wrong, however--and the S&P; index is signaling a sustained revival of interest in big-name stocks--one group of investors will be feeling smug: owners of S&P; index mutual funds.
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Rather than bet on the stock-picking prowess of a portfolio manager, S&P; index funds merely own most or all of the stocks in the index. Thus, they can expect their returns to closely track the S&P;’s return. In essence, rather than try and beat the stock market’s average return, these investors choose to accept the average, or close to it.
Index investing boomed in the 1980s, when blue-chip S&P; 500 stocks soared. But the concept waned in popularity between 1991 and ‘93, when smaller, non-S&P; stocks were red-hot.
In the ‘91-’93 period, investors who trusted a portfolio manager to pick the “right” stocks rather than own a “passive” index portfolio of all the S&P; stocks usually scored well: In 1993, for example, 61% of general U.S. stock funds beat an S&P; index portfolio, according to Lipper Analytical.
But last year, as the market hit rough sailing, fewer than one-fifth of general U.S. stock funds beat the 1.2% “total” return of the Vanguard Group’s S&P; index fund, the largest and most famous of 40 such funds. And so far this year, the 5% total return on the typical S&P; index fund far exceeds the 3.5% gain of the average U.S. fund.
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Comeback Kid
The Standard & Poor’s 500-stock index closed at a record 482.55 on Tuesday, finally topping its old peak of 482.00 a year ago. The S&P;’s tortured climb to new highs, in monthly closes, except latest:
Tuesday: 482.55
