After five long years, the S&P 500 stock index has finally recouped the deep losses it suffered during the financial panic and made investors who hung on throughout the Great Recession whole again.
The index rose to a record closing high Thursday, thanks in large part to the easy money policies of the U.S. Federal Reserve, which has engineered ultra-low interest rates in a bid to jumpstart the economy.
The S&P is a broadly based basket of the 500 largest U.S. companies, and includes corporate leaders such as Apple Inc., Google, Microsoft, Berkshire Hathaway, and Dell Inc. While the Dow Jones industrial average, a narrowly focused 30-stock index, reached new highs earlier this month, analysts believe the upward trek by the S&P index is more representative of the gradually improving fortunes of the U.S. and global economy.
The S&P benchmark has hovered tantalizingly close to record territory for several days, but finally accomplished the feat by rising 6.33 points or 0.41 per cent, to end at 1,569.19.
That edged out the previous peak of 1,565.15 set on Oct. 9, 2007. Soon after the previous record, stocks began to swoon and ultimately lost more than half their value over fears that the collapse in the U.S. housing market would take the economy into a severe recession.
Although the S&P closed at a new record, it is still a smidgeon below its all-time peak of 1,576.09 hit briefly during the trading session on Oct. 11, 2007.
With the advance, two of the three most widely followed stock indexes in the U.S. have reached new records. Left out of the party is the Nasdaq, which is still about 35 per cent below its record reached in March, 2000, just as the dot-com boom of that era began to turn into a bust.
Investors can thank the Fed and its chairman, Ben Bernanke, for the recent stock surge. The Fed has pledged to keep interest rates low until the U.S. upturn moves into high enough gear to substantially cut the country’s stubbornly high 7.7-per-cent unemployment rate, suggesting to many investors that it’s safe to bid up share prices.
“So long as [the Fed’s] in the game, I think stocks and indexes like the S&P and Dow Jones will be reaching new highs,” says Adrian Mastracci, portfolio manager at KCM Wealth Management Inc. in Vancouver.
The march to new records has been powered by advances in most of the S&P’s component sectors, but many technology stocks and related retailers have seen particularly large gains.
The best performing S&P stock so far this year has been movie rental firm Netflix, up about 104 per cent. Electronics retailer Best Buy Co. did nearly as well and is up 87 per cent. Computer-related companies, including Dell Inc., Hewlett-Packard, and Micron Technology are all up at least 40 per cent.
Although the S&P has reached a new high in nominal terms, inflation has whittled away at the value of stocks in the intervening years. The index would have to gain approximately 8 per cent to match its previous high after taking account of inflation.
That degree of catch-up suggests to some analysts that stocks are not yet being pursued with the frothy abandon that would suggest the market is about to top out and go into another decline.
“I think the fundamentals today look better than they did in 2007, in particular because of low interest rates,” says Ronald Balvers, a professor of investment and portfolio management at McMaster University in Hamilton. “I think there is still a ways to go.”
One market that has been notable for failing to march into record territory: Toronto. Canadian stocks are still about 15 per cent below their record of more than 15,000 set in June, 2008. Prof. Balvers says Canadian stocks appear to be undervalued, relative to their surging counterparts in the U.S.
He says an additional reason for recent market strength has been the ability of stocks to shrug off worries over the U.S. fiscal situation and budget wrangling. There had been fears that higher payroll taxes introduced in January and automatic budget cuts that went into effect at the beginning of March would have prompted investor nervousness or a slowdown. But there have been “no serious economic repercussions at this point,” Prof. Balvers says.
The S&P 500 was introduced on March 4, 1957, when it closed at 44.22, a figure that with hindsight seems like an incredible bargain. The advance since then suggests there is something to be said for buy-and-hold investing, with stocks up more than 35-fold over a little more than a half-century.