With its Friday close, the S&P would need just a 2.5 percent gain to
vault the 2K level - something most did not expect during the depths
of the Great Recession.
The move has been anything but frantic. The S&P 500 has not made a 1
percent move in a single session in almost two months, and the CBOE
Volatility Index, the market's favored gauge of anxiety, fell below
11 on Friday, for its lowest close since 2007.
"That the market is going up in low volatility is good for investor
sentiment," said Doug Coté, chief market strategist at Voya
Investment Management in New York.
What's unclear is whether the market is starting to become
overvalued. The forward P/E ratio of the index is now 15.8 and would
rise above 16 if the index hits 2,000 and earnings estimates remain
the same. However, Coté said given current low interest rates, that
level would still be low.
Still, the economy notably contracted in the first quarter of this
year. As always, hope of a takeoff in growth persists among equity
managers, boosted on Friday by employment data showing the economy
finally recouped all the jobs lost during the Great Recession. It
took 77 months to do so, the longest time needed to regain jobs lost
in a recession.
"The jobs report was not only strong, but also not too good, so the
overheating fear is not there yet," said Jim Paulsen, chief
investment officer at Wells Capital Management in Minneapolis.
"It suggests we’re headed up to 2,000 (on the S&P 500) in the next
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As the market has rallied, some, including several members of the
Federal Reserve, have expressed concern that investors are ignoring
risks. The cost to protect against market declines, measured in the
options market, has been steadily falling.
Some would call that complacency, but the lack of actual volatility
is keeping option prices subdued. Realized volatility for the S&P in
the last 10 days has been a bit more than 4 percent, which
theoretically makes the VIX expensive, not cheap.
"A lot of people who hedged their bets by buying volatility, many
did it in the 13 and 13.5 area (on the VIX), so they don't feel a
need to readjust their hedges," said J.J. Kinahan, chief derivatives
officer at TD Ameritrade in Chicago.
The round 2,000 print will scare some, while others will have no
option but to buy in as they chase performance. Paulsen is expecting
a slide in stocks in the second half of the year.
"But right now people are more concerned about getting in before it
goes up more, rather than waiting for a correction," he said.
(Reporting by Rodrigo Campos, additional reporting by Caroline
Valetkevitch; Editing by Nick Zieminski)
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