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Will S&P 500 milestone pave way to new record high?

The S&P 500 passed the 1,500 milestone for the first time in five years on Thursday – if only briefly – demonstrating that the bull market has plenty of life left in it.

Good news is breaking out everywhere you look, justifying the view that the global economic recovery is on track and supporting the latest stock-market rally that has lifted the U.S. benchmark index by 11 per cent since mid-November.

The S&P 500 moved as high as 1,502.27, before settling back in afternoon trading and closing at 1,494.

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In the United States, the employment landscape continues to improve. The latest snapshot on weekly initial jobless claims, released on Thursday, showed the lowest level of claims in five years, surpassing expectations among economists.

You see plenty of encouraging developments elsewhere, too. In China, the economy grew 7.9 per cent in the fourth quarter, marking the first economic acceleration there in two years.

In Europe, risks of a banking crisis and a currency crisis have abated with the central bank taking a more aggressive course of action and vowing to do "whatever it takes" to save the euro. Yields on Spanish and Italian government bonds have plummeted from highs last summer, reflecting greater confidence on the part of investors.

Even Japan, long upheld as an example of what can go wrong with an economy, is making some headway: The new government has approved a bold stimulus package and the Bank of Japan has doubled its inflation target to 2 per cent, in a renewed effort to combat deflation and economic stagnation.

Sure, investors fear policy blunders in Washington. But even there, politicians have averted the so-called fiscal cliff and have also suspended the debt limit, avoiding the threat of an imminent government default.

And as the fourth-quarter reporting season unfolds, results have provided a pleasant surprise. So far, more than 75 per cent of companies within the S&P 500 have beaten earnings estimates, and more than 66 per cent have beaten sales estimates.

Besides driving share prices higher, investors have been expressing their enthusiasm in other ways, too. The American Association of Individual Investors showed in its latest sentiment survey that bullishness among small investors is at a two-year high.

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No wonder U.S. investors have been streaming into equity mutual funds and exchange traded funds in January, promising to end 22 consecutive months of outflows from equity funds.

The big question now is whether the S&P 500 can tackle its biggest obstacle, by rising to a new record high. It wouldn't take much: A gain of just 4 per cent would surpass its previous record high on October 2007.

The only problem is that the higher stocks go, the more nervous some observers get – even if the backdrop is good. To contrarians, rising investor sentiment reflected by the AAII survey and fund inflows is a sure sign that the good news has already been factored into share prices, leaving disappointment ahead.

Bespoke Investment Group pointed out earlier this week that the S&P 500 has gone 477 calendar days – now 479 – without falling 10 per cent or more (based on the index's closing level).

That's the tenth longest winning streak without a correction in the index's history. But it also suggests that investors have been seduced by an unnaturally smooth ride. If things gets bumpy, investors could easily decide to sell high.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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