The Dow Jones industrial average finally did it, marking another millennium milestone—13,000—on Apr. 25. The blue chip equity benchmark can't skip the "13" level the way skyscraper elevators can, but it doesn't seem to matter. Investors may not be as superstitious as NFL place kickers or minor league baseball pitchers, but they are sentimental and love a reason to celebrate. Since the U.S. equity markets bottomed on Oct. 9, 2002, devotees of the Dow have had at least seven lucky times to pop the cork. (Take a look at the accompanying chart.)
The Dow topped out at 11,722.98 on Jan. 14, 2000, about two months ahead of the NASDAQ's 5,048.62 peak on Mar. 10, 2000, and the S&P 500's peak of 1,527.46 on Mar. 24, 2000. The first Dow milestone recovery celebration occurred on Oct. 15, 2002, as the average nudged back above 8,000—although most investors weren't aware that anything was worth celebrating after suffering through peak-to-trough declines of 38%, 49%, and 78% for the Dow, S&P 500, and NASDAQ, respectively. Eight months later, investors not only celebrated regaining the 9,000 level on the Dow but were also heartened by the knowledge that since this level was more than 20% above the prior bear-market bottom, a new cyclical bull market had emerged.
The Dow went on to set millennium milestones every 6 to 8 months thereafter, except between the 10,000 and 11,000 levels, when many investors lost faith in this bull market and began wondering whether Dow 10,000 would be a repeat of Dow 1,000. It took 16 years, from 1966 to 1982, before the DJIA could break meaningfully above that four-digit plateau. That question is rarely asked these days.
One additional milestone was reached on Oct. 3, 2006, that had nothing to with trailing-zero numbers. It was when the Dow set an all-time closing high of 11,727.34. That mark was important, as it removed the stock market's sustained advance from the category of "cyclical" bull market and bestowed on it the mantle of "secular" bull market. This title change does not mean that investors now embrace Billy Graham over Ben Graham. To S&P, a cyclical bull market occurs when a broad equity benchmark has risen 20% or more above its prior bear-market low. A secular bull market is a cyclical bull that has gone on to establish an all-time high.
Just how meaningful is the 13,000 threshold? Not very, according to Mark Arbeter, S&P's chief technical strategist, as it does not represent important support or resistance, nor a significant retracement level from prior declines. It's mainly a sentimental stepping-stone.
A more meaningful threshold, in Arbeter's opinion, is the S&P 500's old closing high of 1,527.46. As of the close on Apr. 24, 2007, a new all-time high on the S&P 500 is less than 3% away. Based on a chart pattern tracking the S&P 500's recent angles of ascent, Arbeter believes the S&P 500 will likely establish a new closing high in either May or June.
Overweight Consumer Staples
Does 1,527 by June mean 1,645 by yearend? Not likely, according to S&P's Investment Policy Committee, which continues to forecast a full-year advance of 6.5% for the S&P 500. It believes the market is not likely to be willing to accept additional risk this late in the bull market and economic cycles, particularly in a period of decelerating earnings growth. We see S&P 500 operating earnings per share advancing 6.6% by yearend, down from the 15% growth rate seen in 2006 and the 13% recorded in 2004.
S&P's Equity Strategy Group recommends overweighting the S&P 500 Consumer Staples, Financials, and Health-Care sectors. We advise overweighting Consumer Staples due to the countercyclical nature of demand for many of the sector's products, coupled with increasing international sales exposure, which we believe will likely cushion vulnerability to slowing U.S. economic growth. Our recommendation on Financials is a contrarian call that reflects an improving technical outlook and our view that negative news flow regarding subprime mortgage problems is now fully factored into the group's valuations.
Finally, we recommend overweighting the Health-Care sector. In an environment of slowing EPS gains for the overall market stemming from an aging economic expansion, we believe investors will gravitate toward sectors with high EPS growth visibility and historically defensive characteristics.