With the S&P 500 up 20% this year without a single 5% pullback, how much is left in the tank?

Published Sat, Aug 28 20218:34 AM EDT

What more could an investor ask for? Stocks are having one of their best years ever in terms of gain per unit of pain, the S & P 500 up 20% not quite two-thirds of the way through 2021 without even a 5% setback along the way. The index is set up to register a seventh straight monthly gain, the first time ever achieving this from February through August, while also tracking toward three straight months of at least a 2% rise. Such three-month runs have only happened 13 times since 1990, two of them in 2021, according to Instinet. And along the way, corporate earnings have run so far ahead of expectations that the market's valuation based on current, higher forecasts is down from where it stood a year ago; the market's become less expensive the easy way. Speaking of easy, Federal Reserve officials have steered investor expectations deftly toward a start to a tapering of the Fed's $120 billion-per-month bond-buying program late this year or early next, without triggering a stress response. Chair Jerome Powell on Friday morning gestured in the direction of such a timetable if the economy stays on track, but also pushed the view that high inflation readings would recede and that tapering has no bearing on an eventual rate hike. The market nodded right along, Treasury yields easing back and stocks ripping 0.9% to a new record. Even the summer surge of the delta Covid variant, while causing an alarming bout of further human suffering, has been unable to knock the uptrend off course, arising just as investors' fears were clustered around the chances the economy would overheat. Aggressive dip-buying reflex No one would wish for it, but the market registered concern about the growth-dampening effects of soaring global Covid infections by taking down overextended cyclical and "reopening" stocks, leaning back on the all-weather growth stocks that dominate the S & P 500. Localized corrections in bank, transport, homebuilding, small-cap, energy and semiconductor stocks reset their valuations and unnerved investors just enough to keep excess enthusiasm at bay. The longer the indexes advance, the more aggressive the dip-buying reflex grows. This chart from BCA Research maps S & P 500 pullbacks from a high since 2015, showing the ever-shallower retreats since the February-March crash last year. A similar, even longer, stretch of scanty setbacks ran from late 2016 all the way through 2017, another post-election year of fiscal-policy excitement, a reflation of nominal economic growth, constant sector rotation and a predictable Fed. Such a setup has hovered at the sunny end of the probability spectrum for a while, as noted here in February : "We can't yet rule out the chance that this will be like 2017 or 2013 – t