Tuesday, February 12, was Mardi Gras in New Orleans and Rio de Janeiro, capped by President Obama's State of the Union speech falling on President Lincoln's actual birthday - a cause for celebration. Earlier in the day, the market celebrated by closing within 1% of its all-time high on the Dow Jones Industrials.
A year ago, I asked the question, "Will the Dow and S&P 500 Reach New All-Time Highs in 2012 or 2013?" It appears the correct answer is 2013. At the time I wrote last year, the S&P 500 needed a huge 16.5% leap to reach an all-time high. Now the S&P is just 3% shy of its magic mark.
Since both the Dow and S&P 500 are within one good day of a new record high, many investors are starting to fear we are nearing another dangerous precipice, leading to a third terrible bear market collapse, like the nightmares we saw in 2002 and 2008. A fear of heights accompanies uncharted peaks.
For reference purposes, the all-time closing highs for the Dow and S&P were set on Tuesday, October 9, 2007 (14154.53 for the Dow and 1565.15 for the S&P 500), followed by intra-day highs on Thursday, October 11, 2007 (14198.10 for the Dow and 1576.09 for the S&P 500).
Assuming we reach new highs fairly soon, what's next - a big decline or a big jump higher?
What History Says About Markets Reaching New Highs (After Long Bear Markets)
First off, forget all those numbers I've just given you. They are meaningful benchmarks, but they are not adjusted for inflation. The S&P's true high, in inflation-adjusted terms, was set on March 24, 2000, not in 2007. On Friday, March 24, 2000, the S&P 500 closed at 1527.46. According to Doug Ramsey of the Leuthold Group, the S&P 500 would have to reach 2026 to beat the 2000 peak, adjusted for inflation.
NASDAQ peaked at 5132 (intra-day) and 5048 (closing) on March 10, 2000. At 3200 today, NASDAQ is still 37% below its peak. Since the S&P 500 is still 25% below its inflation-adjusted peak, this secular (long-term) bear market has been going on for 13 years - not just the five years since the late 2007 peaks.
History says that when a market finally reaches a new high after a decade or more of struggling with sideways or declining aggregates, that new high is more likely a launching pad than a ceiling.
The two best examples of long gaps between new all time highs in the 20th century were the 25-year gap between new highs in 1929 and 1954 and the nearly 10-year gap between January 1973 and November 1982. In both cases, the long-awaited new market highs signaled the dawn of a massive new bull market.
- The Dow peak of 381.17 on September 3, 1929, was not topped for over 25 years, until the Dow closed at 382.74 on November 23, 1954. In that year, economist John Kenneth Galbraith wrote a best-selling book, The Great Crash 1929. He was called before Congress and warned that we were entering a new dangerous phase of the market - but the Dow just kept rising for 18 years.
- The Dow peak of 1051.70 on January 11, 1973, was not topped for nearly a decade, until the Dow soared 4% on November 3, 1982, reaching 1065.49. At the time, the U.S. was in its deepest recession since the 1930s (sound familiar?), with unemployment at 10.8%, yet late 1982 marked the beginning of the longest, strongest bull market of all time, rising 15-fold in 17 years.
History indicates that new highs after a long bear market siege are more likely to be a springboard for future gains than the end of a bull market. Still, the future depends more on today's realities than on past events. Markets in the late 1950s and 1980s rose because of strong fundamentals, not historical parallels.
Five Fundamental Reasons to be More Bullish than Bearish at Dow 14000+
#1: The Energy Revolution. The advent of the Internet fueled the rapid market growth of the 1990s. We have been looking for a similar technological breakthrough in the new century, but we've been looking at smart phones more than smart drilling. One game-changing new technology is hydraulic fracturing, or fracking. As a result of it, and other new technologies, our crude oil production is skyrocketing and natural gas production could rise astronomically for at least three more decades. We are on the fast track toward energy independence, which will likely cure our trade deficit and our dependence on foreign oil sources.
U.S. petroleum exports rose to a record high $140 billion in December, up 147% in the last three years. Our petroleum trade deficit is down 37% in just one year. Economist Ed Yardeni reported this week that U.S. crude oil field production has soared by a million barrels per day (mbd) over just the past 21 weeks, reaching 7.1 mbd, the highest production rate since 1992. Our petroleum imports are under 10 million mbd for the first time since 1999. As a result, the U.S. and Canada combined are the new Saudi Arabia.
#2: The Coming Industrial Renaissance. The dollar's decline has revived our manufacturing and export businesses. Higher productivity, cost-containment, and stagnant wages at home have made America more competitive for manufacturing jobs, while China's wages have soared. According to Fortune's Geoff Colvin, an "industrial renaissance is already under way. Chemical and plastics makers - Dow, Mitsubishi, and others - are building new plants around the country, a stunning turnaround for an industry that has been shutting U.S. plants for years. The Timken Co. is expanding a mill in Ohio to make specialty steels for the oil and gas industry. Railroads are adding cars to haul the rising output of many industries. Best of all, much of the new production will be exported - shrinking our trade deficit and bringing jobs and GDP growth to the U.S." Meanwhile, U.S. businesses have become lean and mean, with trillions in stockpiled cash available for capital expenditure, more hiring, buying back their shares, or boosting their dividends.
#3: Earnings keep rising, while stocks are flat. As of Monday, with 67% of the S&P 500 companies reporting fourth quarter results, earnings are 5.4% ahead of the analysts' consensus estimates, rising 7.3% over the last quarter of 2011. Over two-thirds (69%) of companies beat analyst estimates, better than the 64% delivering positive surprises in the third quarter. Also, 66% beat sales estimates vs. 40% in Q3'12. This rise in earnings keeps the price/earnings (P/E) ratio attractively low, under 15. (The S&P's P/E ratio at the market peak in 2000 was 28.6. Since then, S&P 500 earnings have doubled while stocks are flat.)
#4: Investors aren't overly bullish. At the end of January, only 48% of those polled by the American Association of Individual Investors (AAII) were bullish vs. 75% at the market's peak in early 2000. The bull market began in March 2009. In January 2013, investors finally realized we're in a bull market, pouring $77.4 billion into stock funds. But during the course of the bull run, investors favored bonds over stocks. According to the Investment Company Institute "ICI", investors took $289 billion out of open-ended mutual funds and put $1 trillion into bond funds. As Brian Hogan, president of Fidelity's Equity Group, put it, "one month of strong equity flows after five years of outflows is hardly a sell indicator."
#5: The Fed will keep fueling liquidity for years to come. The market has clearly benefited from past rounds of Quantitative Easing and near-zero interest rates, and the Fed will not likely close the candy store any time soon. Inflation is down and seemingly under control. Consumers aren't overextended, yet they keep spending. China is recovering well (8.4% growth expected this year), while the IMF sees 3.7% global growth this year, rising to 4.0% in 2014. And the housing market is just beginning to recover.
Pessimists will remind us of deficit spending (politics as usual in Washington), but did you notice that January 2013 brought us the first monthly budget surplus in five years - $2.9 billion BLACK ink. In the first four months of fiscal 2013, the federal budget deficit is $290 billion (an $870 billion annual rate), 17% lower than fiscal 2012. The Congressional Budget Office sees a $450 billion deficit by 2015.
Maybe the long-term secular bear market is really over. Only time will tell. Either way, as I concluded a year ago, "Fasten your seat belts and enjoy the ride." This year I say: Keep 'em fastened.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.