S&P 500 Index climbs above 4,000, further upside ahead – UBS

The S&P 500 Index breached the 4,000 milestone last week, continuing a remarkable recovery from last March’s pandemic low. The extent and pace of the rally may be causing some investors concern about its sustainability. But both historical experience and current US economic and policy conditions suggest the rally has further to run, according to economists at UBS.

History suggests investors need not be concerned by record S&P 500 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 $253,645 if they had put the cash to work straight away each month. That investor would have secured $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.”