S&P 500 sets first record since February, erasing its coronavirus plunge
S&P 500 record caps a remarkable rebound fuelled by stimulus and optimism about the world’s ability to manage the pandemic.
The S&P 500 has closed at its highest level ever, capping a remarkable rebound fuelled by unprecedented government stimulus and optimism among investors about the world’s ability to manage the coronavirus pandemic.
The benchmark US stock index rose 0.2 per cent to close at 3389.78, surpassing its prior record of 3386.15 from February 19 and erasing a historic plunge during February and March that ended the longest-running bull market in history.
The S&P 500 is now up 4.9 per cent this year.
The whole chapter, from peak-to-peak, spanned just 126 trading days and marks the index’s fastest-ever recovery from a bear market. The record also ended anticipation over the last week for analysts and investors who had watched the S&P 500 cross the milestone several times in intraday trading only to pull back
Shares of everything from big technology companies to beaten-down energy stocks have rebounded sharply from their troughs. Amazon.com shares have extended their gains for the year to nearly 80 per cent, while Halliburton has more than tripled from its March low and cut its 2020 losses to 33 per cent. Clorox has been among the winners of the pandemic, climbing 49 per cent this year.
The stock market’s turnaround reflects investors’ bets on a pick-up next year in corporate earnings and economic activity. But many are struggling to reconcile the gains with the continuing health crisis that has killed more than 170,000 people in the US alone, sent unemployment to the highest level since the Great Depression and spoiled the longest-ever economic expansion.
“There’s a feeling of euphoria in the marketplace that you’re going to make money,” said Steven Wagner, chief executive of Omnia Family Wealth, of his interactions with investors in recent weeks. “But they’re also bewildered by the disconnect (with the economy) and what they see in their businesses, their lives and what stock prices are doing.”
Setting a new record milestone in 2020 once seemed improbable to many investors. The S&P 500 dropped 34 per cent from its February high to its March low as the pandemic brought economies around the world to a virtual standstill. The subsequent rebound has been nearly as swift.
Investors of all stripes have flooded into the stock market since the government intervened to shore up the economy. Institutional money managers who vow never to bet against the Federal Reserve continued buying stocks after the central bank slashed interest rates to near zero and moved to stabilise credit markets. And zero-commission trading apps lured day traders into the market at the fastest pace since the heyday of the dotcom investing era.
The Fed’s intervention, in the process, pushed bond yields toward their lowest levels ever. Left with few other attractive options for returns in this environment, many investors say they saw little choice but to continue betting on stocks or risk missing out on the rally. The problem has been so common in recent years that it has its own acronym: TINA, or There Is No Alternative to Stocks.
Those dynamics have helped push the S&P 500 up 52 per cent from its nadir in March, led by sharp gains among the market’s biggest companies. The technology giants that make up a disproportionate share of the index have benefited from lockdown measures that have accelerated the adoption of networking, communications and online-shopping services.
Apple has risen 57 per cent so far this year and is nearing a $US2 trillion market value, while Microsoft has jumped by more than a third. Together with Amazon, Google parent Alphabet and Facebook, the companies comprise about 25 per cent of the S&P 500. That gives them considerable influence over the direction of the market.
Those stocks are even more influential in the Nasdaq Composite Index, which has set 34 records this year, including Tuesday’s, while surging 25 per cent. The Dow Jones Industrial Average, on the other hand, has yet to recoup its pandemic-fuelled losses. The blue-chip index of 30 stocks is down 6 per cent from its February high and 2.7 per cent in 2020.
Mark Stoeckle, chief executive of Adams Funds, said the run-up in shares of Amazon and Microsoft, two of his biggest holdings, has been instrumental in helping his fund outperform the S&P 500. However, he started in May taking some of the profits to buy shares of beaten-up stocks, such as casino operator Las Vegas Sands Corp.
“Those are God’s chosen stocks, with the way the market has reacted,” Mr Stoeckle said of shares of the big tech companies.
The S&P 500 now represents a smaller share of the broader economy than it did in years past. Beaten-down airline, cruise and energy stocks, many of which are still down by more than 50 per cent this year, exert a smaller pull on the index than they once did. What’s more, the stock market doesn’t reflect large pieces of the business world, such as the many small businesses that are closing shop.
The stock market’s bulls have chosen to look past a grim economic reality, hitching their wagers to the prospect of rosier times. The economy suffered its biggest contraction on record in the second quarter, and corporate profits have plunged. The unemployment rate hovered just above 10 per cent last month, retail spending fell off and manufacturing activity contracted.
Some of those indicators have begun to improve, supporting the argument that the economy’s recovery will be V-shaped. Earnings, for one, are expected to contract at more modest levels for the remainder of the year before beginning to climb in the first quarter of 2021. Unemployment levels and sales figures have all bounced off their lows in June and July.
Still, the S&P 500’s march back to its high has left the stock market priced for perfection and dangerously exposed to another drumming, some analysts say.
The index currently trades at 22.6 times projected earnings over the next 12 months, according to FactSet. The last time stocks traded at that level was in 2000, before the bursting of the dotcom bubble. Most of the big tech stocks are particularly pricey, trading at 26 times forward-looking earnings.
“Valuations are extremely high,” said Mr. Wagner, who has been hedging investors’ stock exposures with foreign equities, gold and bonds in some cases. “We don’t believe it’s realistic to expect this economy to be at levels it was at in February.”
States could reimpose lockdowns if they can’t corral the number of coronavirus cases within their borders, potentially pushing the number of people who are unemployed back up and prolonging the length of the current recession. Negotiations on further government aid could also falter, leaving stocks exposed to a short-term pullback and investors guessing about the potential ramifications on consumer spending, which accounts for most of the US’s economic activity.
There’s also the uncertainty surrounding this November’s presidential and congressional elections, which have the potential to reshape economic-relief efforts. A Democratic sweep of the White House and Congress looms as an especially big risk, some analysts say. A shift in leadership could lead to the rollback of tax cuts enacted by Congress in 2017, which would stifle profit growth.
Because of those hurdles, some investors say they have little fear of missing out on further gains.
“Stocks at current levels remain vulnerable,” wrote John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, in a recent note. “That could enable short-term and nervous investors, as well as traders, to take some profits without FOMO.”
Dow Jones Newswires