Investors look for more gains as U.S. S&P 500 index hits 2,000 milestone

NEW YORK Mon Aug 25, 2014 6:11pm EDT

A screen shows the Dow Jones Industrial Average after the closing bell on the floor of the New York Stock Exchange July 17, 2014. REUTERS/Brendan McDermid

A screen shows the Dow Jones Industrial Average after the closing bell on the floor of the New York Stock Exchange July 17, 2014.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - The U.S. S&P 500 stock index broke through the landmark 2,000 level on Monday, marking a six-year rally which has benefited many Americans from Wall Street to Main Street.

During that time the unemployment rate has fallen from a high of 10 percent in December 2009 to a low of 6.1 percent in June of this year, but the rally is still seen as largely benefiting wealthier Americans as paltry wage rises have left most Americans with little to invest in retirement accounts.

The gains in U.S. stocks have outpaced those in other major world stock markets in the past year and have been one of the top investments in 2014, beating the safe havens of gold and bonds. Furthermore, the gains have come faster than anticipated; in the most recent Reuters poll, analysts forecast 2,000 would be reached towards the end of the year.

Markets have been able to reach the target earlier in part due to the Federal Reserve's policy of injecting liquidity into the market through its bond-purchase program to keep interest rates low in recent years. The index fell short of 2,000 at the close, ending Monday trading at 1997.94.

Even though the Fed's program is winding down, investors expect the rally will continue as economic growth has recovered this year and low mortgage interest rates have supported housing market activity.

"I continue to think this bull market has several years to go," said Steven Einhorn, vice chairman of hedge fund Omega, which manages $10.5 billion. He predicted this year that the S&P 500 index would reach the 2,000 level.

The benchmark S&P 500, the proxy for the U.S. equity market, encompasses the largest companies across various industries and is widely followed by pension funds, mutual funds and other institutions, with more than $5.14 trillion in assets benchmarked to the index.

Wage and salary earners have benefited from the S&P’s rise. The average balance of a Vanguard 401(k) defined-contribution retirement account in July was $102,104 or nearly double the level of $56,030 during the Great Recession of 2008, according to the Vanguard Group.

"The rise in the S&P 500 is a virtual twin to the rise in the total U.S. stock market, so of course investors, and especially index fund investors, who received their fair share of those returns, feel wealthier," said John Bogle, Vanguard's founder and former CEO, who started the first S&P index fund in 1975.

Rising stock-market values have boosted large companies' pension funds also. These defined-benefit plans reported among their best annual returns in 2013, dramatically closing funding gaps owed by companies to these funds that had opened up because of the collapse in stock market values during the financial crisis.

The stock market rally has helped repair state public finances as well. In California, the state with the most volatile income tax flows in the country, revenues for the last fiscal year exceeded expectations. In Massachusetts, where the rainy-day fund is tied to capital gains taxes, emergency reserves have spiked to $1.36 billion, roughly the level in 2010.

The rally has helped push global deal activity to a seven-year high and the gains have encouraged corporations to buy back vast amounts of their own stock, enabling them to increase earnings per share even though revenue growth has been slow.

ONLY GAME IN TOWN

The S&P 500 has beaten its popular rival, the Dow Jones Industrial Average, which only includes 30 stocks. The S&P has risen 195 percent from its closing low in 2009, while the Dow is up 161 percent and the tech-heavy Nasdaq is up 260 percent. The Dow saw a record closing high of 17,138.20 on July 16.

    The scale and speed of the rally has raised questions about market valuation. The S&P's forward price-to-earnings ratio is currently 15.7, about in line with historical norms, but some worry stocks will get hit once the Fed winds down its 'quantitative easing' bond-buying program.

"I'm a little worried about where equities are in the short run, between Labor Day and the end of the year, since I expect some kind of adjustment as QE winds down," said David Joy, chief market strategist at Ameriprise Financial in Boston.

"I'm not feeling too enthusiastic about stocks. I don't see a lot that's cheap. I'm more of a seller than a buyer," said Joy, who helps oversee about $750 billion in assets.

   For 2014, the index is up 8.1 percent, outpacing major overseas markets as well as asset classes like gold and Treasuries.

The Barclays U.S. aggregate bond index is up 4.43 percent year to date, while the MSCI International ACWI Price Index, an index of global shares, has gained 5.4 percent.

Still, individuals without substantial retirement funds may have not benefited from the rally. Much of today's action comes from large institutions, suggesting that individuals may have been scared off by the financial crisis, missing the multi-year rally.

"Americans are wealthier but bear in mind that the top 20 percent of American income earners own 90 percent of the market," said Tobias Levkovich, chief U.S. equity strategist at Citigroup. "It does help the economy overall but may not help all segments of demand."

Hedge fund performance has also trailed stock market returns in the last two years. According to Levkovich, hedge funds have trailed the S&P 500 index in every quarter running since the second quarter of 2012, and for this year the HFRX Equity Hedge Index has gained just 0.7 percent.

Short sellers, who bet on market declines using borrowed shares, have also been squeezed.

"Funds with any kind of short bias have had difficulty keeping their head above water," said Frank Davis, director of sales and trading at LEK Securities in New York. "They're trying to act contrary to the market's movement, which has been dramatically moving up."

(Reporting by Ryan Vlastelica, Lauren Young, Megan Davies, Jennifer Ablan and Daniel Bases in New York and Robin Respaut in San Francisco; Editing by Megan Davies, David Gaffen, Clive McKeef and James Dalgleish)

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