Why S&P 1,527 Is Worth Watching
S&P 1527 doesn't sound anywhere near as sexy as Dow 13,000.
But in many ways, a new high for the Standard & Poor's 500 index will be a much more important milestone for the stock market to reach.
Today, the S&P 500 index of blue-chip stocks is within striking distance of its old record high of 1527.46, set on March 24, 2000–just before the Internet bubble burst, sending the S&P as low as 776.76 on Oct. 9, 2002. "The market, as defined by the S&P 500, continues to make its way toward a full recovery from its October 2002 lows," says Howard Silverblatt, senior index analyst with Standard & Poor's.
Indeed, thanks to a slew of recent positive earnings news and merger activity–the latest being the $33 billion bid by the aluminum manufacturing giant Alcoa to buy rival Alcan–the S&P is up around 6 percent year to date.
And the benchmark index is trading above the 1500 level for the first time in six years.
Many believe that as long as Wall Street is immersed in merger mania, the index will climb into record territory. In addition to the Alcoa news, several other big deals are on the table. Last week, for example, came rumors that the software behemoth Microsoft was interested in acquiring Internet giant Yahoo! That news followed the unsolicited bid of Rupert Murdoch's News Corp. to acquire Dow Jones, which owns the Wall Street Journal. Alcoa, Microsoft, Yahoo!, News Corp., and Dow Jones are all members of the S&P 500.
The Dow Jones industrial average has been setting one record high after another. So, too, has the Russell 2000 index of small stocks.
But the S&P 500 is a much broader index of equities than the Dow, which is made up of only 30 stocks. And unlike the Russell 2000, the S&P 500 represents the performance of blue-chip domestic equities, which account for the vast majority of the U.S. stock market's value.
The S&P 500 has had a longer road back from the 2000-2002 bear market because it lost considerably more than the Dow Jones industrials did during the downturn, notes James Stack, editor of the InvesTech Market Analysts newsletter. From peak to trough, the Dow lost 37.8 percent of its value, while the S&P 500 tumbled 49.1 percent, in part because of its greater weighting in technology stocks.
Another reason investors are paying so much attention to S&P 1527 has to do with market momentum.
"Psychologically, it's going to have a short-term positive impact for investors," says Stack.
And market psychology can be a positive force, at least in the short term. Typically, after bear markets, new bull markets grow in fits and starts as investors who lost money during the correction try to recoup their losses before they sell.
Once the stock market establishes record highs, investors take that as a sign that most of the worry warts–who had been waiting for the right time to sell–have been wrung out of the market. Once they exit, it leaves a pool of investors with stronger convictions about stocks going higher.
Still, Stack warns about getting too excited about S&P 1527 just yet. "One has to be careful to assume that new highs in the S&P will extrapolate into an extended move upward for stocks," he says.
He notes that the Dow established a new record high of 1000 in 1966. But it spent the next 16 years bobbing above and below that threshold before it finally began to surge higher for good. "There's an old adage on Wall Street," he says. "Every new high in the market is bullish, except the last one."
Another sobering thought: While the Dow has already recouped its bear market losses and the S&P is close to returning to record levels, the Nasdaq composite index–which is trading under 2600–is still almost 50 percent below its record high of 5048 established in March 2000.
advertisement
