How high can US equity markets go?
The S&P 500 has entered uncharted territory of late and is flirting with the 2,400 mark. The Dow Jones Industrial Average (DJIA), meanwhile, just breached 21,000 and shows no signs of faltering.
The S&P 500 has been on an especially bullish run of late. Since 8 November 2016, the index is up about 12%.
Many have attributed the recent performance to the so-called Trump effect, as investors anticipate lower taxes and reduced regulations under President Donald Trump, while presumably discounting the potential for trade wars or other geopolitical risks. This turnabout is especially curious given all the dire warnings in the run-up to the election.
The dour predictions juxtaposed with the subsequent surge suggest something of a bipolar disorder and reaffirm the inherent fallibility of assigning a political explanation to market performance.
Nevertheless, whatever the cause of the recent bullish streak, some see signs of irrational exuberance in the S&P 500's rapid ascent. After all, the average Wall Street estimate pegged the index closing out 2017 at 2,364. It's barely March, and that figure has already been eclipsed.
So what's going on? Are we in the midst of a stock bubble, in the early stages of a historic boom, or somewhere in the middle?
For a sense of the consensus on these questions, we conducted an informal poll of CFA Institute Financial NewsBrief readers for their perspective on where the index will be a year from now.
What is your expectation for the total return of the S&P 500 index over the next 12 months?
Over two-thirds of the 991 respondents (67%) anticipate the S&P 500 is not due for a major correction one way or the other and expect it to rise or fall between 10%.
What's the major takeaway from this? Most investors think that the index is more or less appropriately priced, that it isn't in either boom or bubble territory.
The story at the extremes is also illuminating.
One in five respondents see the index rising by at least 10% over the next year compared to only 13% who see it falling by 10% or more.
Put another way: There are more bulls than bears.
But go further out on the margins and the story is slightly different: 6% think the index is due for a major downward correction in excess of 20%. That compares to only 2% who see the index expanding by 20% or more.
So ultra bears outnumber ultra bulls.
These data points aside, the broad consensus is that a year from now the S&P 500 won't look that much different from what it does today.
So to return to the opening query: How high? Probably not much higher and maybe even a bit lower.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.