S&P 500 climbs above 4,000: further upside ahead

The S&P 500 closed above 4,000 for the first time ahead of the Easter break and made further gains on the US market’s return on Easter Monday to close at 4,077.9. The S&P 500's record high followed gains of 5.8% in the first quarter, which also marked the best 12-month rolling return for the index since 1936. The index has now rallied 82% from last March’s closing low. Since inception in 1928, it has taken the S&P 500 a median of 9.9 years to double. The move from 2,000 to 4,000 took only 6.6 years.

After such a rally, some investors may be concerned about whether the market’s gains are sustainable, particularly given the 80-basis-point rally in 10-year US Treasury yields this year, which has prompted bouts of market volatility. But history suggests investors need not be concerned by record highs:

• All-time highs are no barrier to further gains. In fact, based on data going back to 1960, stocks have performed slightly better than average after hitting all-time highs. Our analysis shows that after reaching a fresh high, stocks rose another 11.7% in the following 12 months, compared with 11.3% from levels below record highs.
• Rising nominal yields and equity rallies tend to go hand in hand. In the past 25 years, there have been 10 periods in which the US 10- year bond yield has risen by more than 100bps. And in all instances, global equities delivered flat or positive returns. Also, the current rise in yields is being driven more by a stronger growth outlook than concerns over monetary policy tightening.
• Perfect market timing has little benefit. An investor putting USD 1 of their monthly paycheck into the S&P 500 since 1945 would have grown their portfolio to USD 253,645 if they had put the cash to work straight away each month. That investor would have secured USD 261,699 (or a paltry 0.03% more per year) if they had timed the market perfectly by only investing at levels the market never subsequently dropped below.

Current US economic and policy conditions provide further support for equities. The US labor market continues to recover as re-opening supported by the vaccination program underpins a rebound in service sectors.

Last Friday’s US jobs report showed an increase of 916,000 in March nonfarm payrolls, ahead of consensus expectations for a gain of 660,000 and the strongest figure in seven months. Leisure and hospitality showed the biggest gains. The positive picture was confirmed on Monday as the ISM services index rose 8.4pts to 63.7pts, the highest reading since the data series started in 1997 and well above the expected 59.0. The ISM employment sub-index rose to 57.2 from 52.7.

Last week, US President Joe Biden unveiled a USD 2.25 trillion plan to modernize the nation’s infrastructure. Unlike the recently passed USD 1.9 trillion COVID-19 relief package, we wouldn’t expect a short-term boost to growth if the deal were passed, since the spending would take place over around eight years. But we expect a further lift for companies exposed to structural growth trends.

Against this backdrop, we recommend continuing to position for reflation as the economic recovery gathers pace. We believe the rotation out of growth stocks and into cyclical areas of the market has further to run, and we recommend investors tilt their stock exposure to sectors that are likely to benefit from faster economic growth and a steeper yield curve, including financials, industrials, and energy stocks. The vaccination-led economic reopening should also favor small- and mid-cap stocks compared to largecaps.

Investors can also take advantage of periods of heightened volatility by adding long-term exposure to stocks through strategies such as averaging-in purchase programs and structured investments. For investors who can use options, skews in volatility also present opportunities to gain advantageous market exposure.

Mark Haefele

UBS AG