The only thing missing yesterday was Dow 10,000.
When various market indexes hit milestone levels, everyone tends to pay attention. On Monday, we saw key levels on not one but three closely followed measures:
- The S&P hit the 1,000 level for the first time since last November, led by Gannett's
(NYSE:GCI)14% rise and a jump of 11% for KeyCorp (NYSE:KEY).
- The Nasdaq Composite closed above 2,000, to reach levels not seen since last October. Dozens of stocks, including Crocs
(NASDAQ:CROX)and Dawson Geophysical (NASDAQ:DWSN), rose 10% or more Monday.
- Class A shares of Berkshire Hathaway
(NYSE:BRK-A) (NYSE:BRK-B)closed at exactly $100,000. It was the first time they had closed in six figures since January.
With so many psychological barriers crushed in the same day, is there anything left to keep stocks from pushing strongly higher? Or does today mark the beginning of the end of the rally, with a return to more reasonable valuations now imminent?
Looking at the crystal ball
Of course, there's no way to be absolutely certain what's coming next. On one hand, trailing earnings over the past 12 months are still incredibly low, and they're pushing the price-to-earnings ratios of major indexes to ridiculously high levels.
Yet historically, if you've waited for definitive signs of a strong recovery to appear before investing, you've often missed out on the beginning of upward market moves. If earnings maintain their current stability, those large P/Es may come down to more manageable levels in coming quarters. Still, earnings would have to grow quickly and substantially to support the 50% jump in the S&P 500 that we've seen since March.
The thing is that for all of these measures broken and scenarios analyzed, we've been there before. So let's look at how they behaved on previous trips through these barriers, as we search for clues on how the market is likely to act this time around.
The S&P 500 first broke the 1,000 barrier in 1998. At that point, the index had tripled in less than eight years, thanks to the 1990s bull market. When the S&P hit four digits in February, stocks didn't really look back -- over the ensuing six months, the index rallied almost to 1,200.
Then the Russian financial crisis hit, and it helped to bring about the events that destroyed the infamous Long-Term Capital Management. But even though that event brought a long-awaited correction to the bull market, the index pushed onward after a couple of months. It eventually eclipsed the 1,500 mark within the next two years before technology stocks finally started to buckle.
After the tech bubble burst, the S&P again took a run at 1,000, and this time it flirted with that threshold longer. Yet after a few months of back and forth in the summer of 2003, the S&P finally held and advanced strongly for the next four years, until the latest bear market began.
The Nasdaq's experience has been much different. In 1998, hitting 2,000 was just a bump in the road on the way to 5,000. But oddly, between 2003 and 2005, the Nasdaq went above and below 2,000 regularly, and it tested the level as late as 2006 before finally advancing with the rest of the market.
With tech stocks leading the rally so far, the tech-heavy Nasdaq may seem to be the most vulnerable of these three measures. But some argue that the Nasdaq has waited long enough and that tech giants such as Google
Berkshire first hit its milestone much more recently than the others did, when it hit six figures in October 2006. Once it got there, though, it kept marching higher, and it eventually reached 150,000 in December 2007 before settling back.
So far, its rebound has underperformed its peers. It lost more than half of its value from its highs to the March lows. But shares are up by "only" 43% in the past five months.
Don't let market milestones distract you from the true goal of investing: buying stocks for less than they're really worth. Whether the market sputters from here or keeps on pushing forward, strong companies will keep making money for their shareholders. Focus on that, and you'll get the best results.
For more on smart investing:
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- These stocks are worth buying again.
- 3 cheap stocks our experts like now.
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Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. Google is a Motley Fool Rule Breakers selection. The Fool owns shares of Berkshire Hathaway, which is a Stock Advisor pick and an Inside Value recommendation. Dawson Geophysical is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy hits new milestones every day.