The S&P 500 Goes Sky-High Above the 4,000 Level

On April 1, 2021, the S&P 500 rode a technology stock revival to rise above the 4,000 level for the first. But it was no April Fool’s joke. It marks the least amount of time to reach a 1,000-point milestone. It took nearly five years for the index to go from 2,000 to 3,000. Going from 3,000 to 4,000 only took one year and nine months.

President Biden’s Infrastructure Bill Thrills Investors, But Generates Concern about Taxes to Pay for It

The most recent leg of the S&P 500’s rise appeared after President Joe Biden revealed his $2 trillion-dollar infrastructure plan. The proposal calls for spending on roads, bridges, green energy, and upgrades to water systems. This is on top of the $1.9 trillion stimulus bill that was signed on March 11th. The infrastructure plan calls for eight years of spending but also calls for a raise of the corporate tax rate to 28% to pay for all of it. Some investors worry that these high taxes will cut into corporate profits and put downward pressure on stock prices.

The Success of the U.S. Vaccine Rollout Has Produced Light at the End of the Tunnel

With the vaccine rollout picking up steam, there has been a surge in the energy sector in anticipation that lives will be getting closer to normal. The thought of normalcy brings visions of a recovery, which has sent financial stocks upward as well. Since the beginning of 2021, the energy and financial sectors have risen 29% and 15% respectively. “People are optimistic about growth, about the reopening of the economy, about going back to normal as a result of the vaccine rollout,” said chief investment officer of passive equity and multi-asset strategies for Charles Schwab Investment Management, Omar Aguilar. “But it’s a tug-of-war between growth and inflation.”

President Biden’s Spending Bills Have Sparked Inflation Concerns

President Joe Biden’s stimulus bill was met with worries about inflation. Treasury Secretary Janet Yellen dismissed these fears, saying that inflation before the pandemic “was too low rather than too high.” She said, “If it turns out to be inflationary, there are tools to deal with that.” Desmond Lachman, an economist for the right-wing American Enterprise Institute and a former deputy director with the International Monetary Fund (IMF) reacted to the stimulus and relief bill in this way: “If inflation gets out of control, the Fed has to step on the brakes and start jacking up interest rates, and that normally produces a recession.”

Jobless Claims Rose in April, But Other Signs are Positive

Jobless claims for the week ended April 3rd were 744,000. This was higher than the 694,000 that Dow Jones had estimated and higher than the 728,000 jobless claims from the week before. First-time unemployment insurance claims rose higher than expected, but other reports have shown positive signs in the job market. March nonfarm payrolls rose by 916,000 and the unemployment rate fell to 6%.

The S&P 500 Has Been on the Overbought Side from a Technical Perspective

From a technical perspective, the S&P 500 has been hugging the upper band of the Bollinger Bands since the summer of 2020. The RSI for the index is also stuck near the overbought line of 70. This could mean a correction for the S&P 500, if only in the short term.

Composition of the S&P 500

The S&P 500 is an index representing large-cap U.S. equities. There is over $11.2 trillion indexed or benchmarked to the gauge and it is comprised of companies that amount to approximately $4.6 trillion. Of the companies that make up the index, over a quarter of them are in the information technology sector (26.6%). Health care (13%), Consumer Discretionary (12.4%), Financials (11.3%), Communication Services (10.9%), Industrials (8.9%), Consumer Staples (6.1%), Energy (2.8%), Materials (2.7%), Utilities (2.7%) and Real Estate (2.5%) make up the rest.

History of the S&P 500

The Standard & Poor’s 500 was created in 1957 to track the value of 500 corporations on the New York Stock Exchange. During the economic boom that followed World War II, the index rose to almost 700 points. During the 1970s, America’s stagnant growth and high inflation (commonly referred to as stagflation) caused the index to fall under 300. The index fell 57.7% during the 2008 financial crisis and resulting Great Recession. During the coronavirus pandemic of 2020, the index fell 51%.

The S&P 500 is an Exclusive Group of Companies

To be included in the S&P 500, a company must be selected by the committee and judged to be representative of the companies that make up the U.S. economy. There are hard requirements: market capitalization must equal or exceed $8.2 billion and the ratio between annual dollar value trade over float-adjusted market capitalization must be greater than $1 million. The stock must also maintain a minimum monthly trading volume of 250,000 shares for each of the six months before being evaluated for the index.

Conclusion

The S&P 500 rising to an all-time high is a great milestone, especially in such challenging times. But the enthusiasm is tempered by the potential of an inflationary economic environment and the possible intervention, and overstepping, of the Fed to correct it. The higher taxes required to pay for the infrastructure proposal that President Biden has offered give pause to those who worry that rising corporate tax rates will cut into profits and to the stock prices that factor them into their valuations.

Economic measures of a recovery are mixed, but the success of the vaccine rollout in the U.S., while not a total success, is giving hope that things will get back to normal. The S&P 500 is considered a bellwether and is composed of 500 large-cap stocks considered representative of the U.S. economy. It has marked the good times and the bad times and will likely continue to do so for many years to come.

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