The S&P 500 index continued its upward momentum Monday, building on the record high levels it reached Friday. Concurrently, both the Dow Jones Industrial Average and the tech-heavy Nasdaq 100 extended their own all-time highs. The Dow hit the milestone of 38,000, a record for the blue-chip index.
Wall Street veteran Ed Yardeni is trying to temper the growing excitement in the markets.
In his most recent post, published on Sunday, Yardeni outlines three potential historical precedents for the economy, the Federal Reserve and the stock market’s future performance.
The first scenario, for which Yardeni assigns a 60% probability, is a “Roaring 2020s” outlook. This envisions subdued inflation and expanding profit margins for companies, ultimately leading to gains in the stock market.
The second scenario, with a 20% probability, resembles the 1970s. In this scenario, there are risks of a second inflationary energy shock, reminiscent of the 1970s, which prompts the Federal Reserve to raise interest rates once again, resulting in poor stock performance.
The third scenario draws parallels with the 1990s-style melt-up and carries a 20% probability. In this scenario, the Federal Reserve becomes concerned about inflation falling below 2% and responds by aggressively cutting interest rates, even as the economy continues to perform well. This prompts a stock market melt-up, with technology stocks leading the way.
“Irrational exuberance would make a comeback in this scenario. It’s a lot of fun for stock investors while it lasts,” Yardeni said.
He cautions that this scenario could lead to a valuation bubble bursting if the Fed is forced to raise interest rates due to signs of asset inflation transitioning into price inflation.
S&P 500 Performance Highlights
- The S&P 500 closed at 4,850 points Monday, up 0.2%, marking its third straight positive session.
- The SPDR S&P 500 ETF Trust SPY closed at $483.52, up 2.4% since the start of the year.
- Monday’s session saw eight out of 11 S&P 500 sectors ending in positive territory.
- The top performing sector was the Industrials Select Sector SPDR Fund XLI, up 0.75%
- The laggards were the Utilities Select Sector SPDR Fund XLU and the Consumer Staples Select Sector SPDR Fund XLP, both down 0.5%.
- Top performing stocks: V.F. Corporation VFC, up 5.03%; Synopsys Inc. SNPS, up 4.8%; and Albemarle Corp. ALB, up 4.9%.
- Worst performing stocks: Archer-Daniels-Midland Company ADM, down 24.2%; Gilead Sciences Inc. GILD, down 10.1%; and Bunge Limited GB, down 4.4%
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