By Mark DeCambre, MarketWatch
Wall Street stocks were winning again on Monday, following the results of first round of a French presidential election on Sunday that put to rest one of investors’ worst fears, giving the market a chance of another milestone being taken down by the U.S. equity market: Nasdaq 6,000.
The Nasdaq Composite Index /quotes/zigman/12633936/realtime COMP +0.08% has been steady despite tapering enthusiasm for stocks as investors took a breather from the so-called Trump rally, fueled by hope of tax cuts, infrastructure spending and deregulation from President Donald Trump.
Now, as the Dow Jones Industrial Average /quotes/zigman/627449/realtime DJIA -0.01% and the S&P 500 index /quotes/zigman/3870025/realtime SPX +0.03% were rallying after a strong showing by centrist Emmanuel Macron in the French presidential election, averting fears of a head-to-head battle between euroskeptic candidates, far-right politician Marine Le Pen and far-left Jean-Luc Melenchon, the Nasdaq is trading at a record and looking seriously at touching the 6,000 milestone in the near-term.
“The Nasdaq has not seen a major new high, which is to say a breakthrough of a big round number, since way back in 2000,” said Brad McMillan, chief investment officer at Commonwealth Financial Network, back in February when the Nasdaq was flirting with those lofty levels.
How significant is Nasdaq 6,000? Maybe not at all, but the Street adores symbolic levels.
“We tend to get attracted to big round numbers,” said Michael Antonelli, trader at R.W. Baird & Co. Of the attempt at the 6,000 level, told MarketWatch back in February.
Although many on Wall Street fret about lofty valuations in light of a lack of specificity around Trump’s legislative agenda, including tax cuts, infrastructure spending and deregulation, some continue to make the case for further climbs for equities, particularly as corporate earnings emerge better than expected and a degree of risk subsides.
Is it different this time?
The last time the Nasdaq was somersaulting higher was in the late 1990s and early 2000s, during the notorious dot-com bubble. That period of buzzy tech companies with dubious business models, exemplified by Pets.com, didn’t end well for investors. In fact, Wall Street took 15 years to recover, with the index not returning to the 5,000 level again until March 2015.
But is it different this time? Ryan Detrick, senior market strategist at LPL Financial, says the Nasdaq is more diverse, with fewer volatile tech stocks, and perhaps more stable. “Tech stocks don’t make up nearly as much of the Nasdaq as they once did. Incredibly, tech is less than half of the Nasdaq today. This could be a positive sign, as this influential group isn’t seeing the type of love it did 18 years ago, and the Nasdaq isn’t so top heavy in one group,” he wrote in a February research note (see chart below):
We’re just getting started
Looking at the Dow Jones Technology Index /quotes/zigman/627462/realtime XX:DJUSTC +0.07% , another popular gauge of tech-sector performance, Detrick argues that tech, which has only recently marked a recovery, has more pent-up potential. This is a similar argument made for the banking sector, which had been in the doldrums since the 2008-’09 financial crisis brought the sector to its knees. In other words, although we have seen a healthy move for the sector, it can still go higher because it is comparatively not as rich as similar moves in other sectors, and it has more latent energy to carry it to new heights. To be sure, the banking sector’s rally since November has petered out, but bank stocks were among the S&P 500’s 11 sectors trading sharply higher on Monday.
The chart below attempts to show that a longer trend around a base, or lower level, the sharper its move higher, or breakout:
Commonwealth’s McMillan added that the market may still be capable of higher highs. “With valuations high, but still well below the peak of the tech bubble, there may well be enough room to get it there as earnings and sentiment both improve,” he said, referring to corporate earnings and investor sentiment.
Charlie Bilello, research director at investment adviser Pension Partners, also pointed out on Monday that the tech sector also hit a record in terms of total returns, as gauged by the exchange-traded fund Technology Select Sector SPDR ETF /quotes/zigman/1475411/composite XLK -0.05% , which tracks the tech sector.
To be sure, broad concerns about bubbly valuations and worries that geopolitical or domestic problems could whack markets back down remain persistent. But the eerily low level of the CBOE Volatility Index /quotes/zigman/2766221/delayed VIX -1.80% , sometimes known as the fear gauge, implies that investors aren’t too frightful.
Investor takeaway : But of course, complacent markets mean that smart investors should be cautious while keeping their eyes on records.
—This article was originally published Feb. 15