What Happens When the S&P 500, Dow, and Nasdaq All Make New Highs?

Last Thursday, the S&P 500, Dow, and Nasdaq all made new all-time highs on the same day for the first time since December 31, 1999. This event has drawn a good deal of attention, as that last occurrence was right before the tech bubble burst, the Nasdaq dropping nearly 50% the next year, and the S&P 500 dropping three straight years for the first time in a generation. Could last Thursday be a warning of bad things to come?

First things first, going back to data on the Nasdaq since 1979, the three major indexes have made new highs on the same day 148 other times besides last week. As this chart shows, the majority of these took place in the midst of larger bull markets. Yes, one happened right ahead of the 1987 crash and then the recent one took place at the end of a nine-year win streak for stocks—but the majority of the time these took place in uptrends or potential consolidations.

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Breaking it down by years, 1995 had a record 25 times the S&P 500, Dow, and Nasdaq all made new highs on the same day. That of course was one of the strongest years ever for equities, with S&P 500 gaining 34% and the Nasdaq soaring nearly 40%.

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Looking at the returns on the S&P 500 after this takes place does show the potential for some near-term weakness going out three months, but going out longer things appear to get back to normal. In fact, a year after this happens, the S&P 500 is up a median of 17.2%—well above the at-any-time median return of 11.1%.

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This event doesn’t appear to be a major warning sign for equities. There could be a near-term pullback or consolidation, but bigger picture this looks like more of a positive than a negative. After the S&P 500 just had its tightest two-year consolidation in 20 years, this breakout looks technically strong. Lastly, one major different between now and 1999 worth noting is market breadth is much different. In 1999 tech was about the only sector leading, with other groups breaking down and not pulling their weight. Eventually, this weak underpinning cracked. Compare that to today, where various sectors are participating and the NYSE advance/decline line just made another new all-time high, suggesting breadth is strong and this advance is healthy.

 

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