No Joke: An April Fool’s Day High for the S&P 500

It’s April Fools’ Day, but the joke is on the bears as stocks gained today, led by Intuitive Surgical (ISRG). TripAdvisor (TRIP), Cisco Systems (CSCO), Boeing (BA) and Walt Disney (DIS).

The S&P 500 gained 0.7% to 1,885.52 today, a new record high and its seventh of the year. The Dow Jones Industrial Average rose 0.5% to 16,532.61, its second highest close ever and just 0.3% from a new high.

The Dow was given a boost by Cisco Systems, which gained 3.9% to $23.10, Boeing, which rose 2.2% to $128.21 after finalizing an order for new planes, and Disney, which advanced 1.9% to $81.57. The S&P 500′s biggest gainers included Intuitive Surgical, which rose 13% to $493.60 after the FDA approved a new robot device, and TripAdvisor, which gained 5.5% to $95.55.

April Fools’ Day has been historically strong for stocks, notes S&P Dow Jones Indices’ Howard Silverblatt. He explains:

The market continued its move-up from yesterday (helped by Yellen's remarks), setting  its seventh new closing high year-to-date…The market also set a new closing high on April 1, 1998, and then beat that high the next day.  Guess April fool's day is lucky – 42 of 62 historically are up.

BofA Merrill Lynch’s Stephen Suttmeier reminds investors that April has historically been strong:

Seasonals are bullish in April. Going back to 1928, the S&P 500 is up 62.8% of the time in April. With an average return of 1.25%, April is the 4th best month of the year (side bar). But seasonals turn riskier beginning in May, especially during the mid-term year of the Presidential Cycle.

Morgan Stanley Wealth Management’s Michael Wilson thinks earnings will have to do the heavy lifting now that the Fed has started to move:

Every economic cycle is different, but as they evolve, they generally share many of the same characteristics. Most recently, the US economic recovery passed a significant milestone—the point at which the Federal Reserve deems it appropriate to tighten monetary policy. One of the ways this cycle has been different is that the Fed has used a new monetary-stimulus tool: Quantitative Easing (QE). In December, the Fed announced it was time to wind down QE. With respect to the economic cycle, this is no different than the Fed's first rate hike after a recession. While this creates some uncertainty, we believe the Fed has it right, and it is time to remove monetary stimulus because the economy can now stand on its own…

Does this mean we should expect equity markets to continue to boom? Not necessarily. Equity markets rallied quite strongly last year, in part anticipating the Fed's affirmation that the recovery could be self-sustaining. Instead, we should expect equity markets to continue to rise more in line with earnings growth, as valuations are now fair. It's no coincidence that valuation measures peaked in December when the Fed announced it would begin tapering QE. To us, this suggests equity returns closer to 7% to 8% in the US and not the 20%-plus average annual return we have enjoyed during the past five years.

After the rocky start to the year, we’ll take it.