How the stock market has evolved a year since the arrival of Covid
A visitor in front of the Wall Street Bull, a bronze sculpture in Manhattan’s financial district in New York City, May 19, 2020.
Timothy A. Clary | AFP | Getty Images
A year after the Covid pandemic forced the country to shutdown, the stock market has been reshuffled in ways Wall Street never imagined.
Stocks plunged last March as the world faced the frightening spread of a virus that many believed would never reach the United States. The S&P 500 lost more than 15% in a meteoric drop on March 11 and 12. The index fell more than 30% on March 23.
Perhaps even more surprising than the downfall was the market rebound that followed, propelled by the twin engines of fiscal policy, including a rollout of Federal Reserve programs. The S&P 500 is up nearly 80% from the March low and just hit a new high on Thursday.
“The policy response has been significant and meaningful, and therefore prevented what could have been a much worse outcome,” said Tobias Levkovich, chief US equity strategist at Citi.
The virus was a great equalizer. Much of the country was learning to work and go to school from home. Meanwhile, restaurants, gyms, and other places where people congregate have either been closed or have changed dramatically.
But America has adapted, as have investors.
They’ve racked up tech stocks that have benefited a homebound population, including Netflix, Zoom, Amazon, and Peloton.
When the economy started to reopen, the money moved into recovery-themed stocks including energy, industrials, materials and financial services. These sectors are now leading the market, replacing high-tech stocks.
After years of a steadily growing economy, the pandemic has resulted in a shocking decline in gross domestic product. A strong rebound followed, aided by easy monetary policy and budget spending booms.
The $ 1.9 trillion stimulus package, signed by President Joe Biden on Thursday, will unfold against the backdrop of a patchy recovery. The service sector had never before driven the economy into recession; it is the last to return. Around 10 million people are still unemployed.
“Economic volatility is here to stay … and it’s different from the last 30 years,” said Julian Emanuel, head of equity and derivatives strategy at BTIG.
“There is no escape when you think of the combination of [GDP] being down 31% for one quarter and up 33% in the next quarter, ”he said.
“The application of record stimulus measures, the equivalent of about 36.2% of GDP the following year … it will just be an environment where fluctuations from quarter to quarter will be much larger than ‘they weren’t,’ Emanuel added.
Over the past year, a new cohort of retail investors – many using no-cost online trading platforms – has emerged as a significant part of the market.
Goldman Sachs expects households to be the biggest source of demand for stocks this year, with $ 350 billion pouring into the market, compared to $ 300 billion from companies.
“These are newer and younger investors embracing speculation like never before, as evidenced by call option volumes which are multiples of the record volumes of previous years,” said Emanuel of BTIG.
Investors also use record the amounts of debt on margin to finance their investments.
So far, the most speculative activity is focused on meme stocks, Emanuel said.
GameStop is the poster child of that volatility, a title that has been ditched for dead by many but adopted by a group of retail investors.
Instead of calling their brokers, these traders turned to the Internet. WallStreetBets, a forum on Reddit, has become a powerful force in market activity.
“The question is whether it will end like it did at the end of the rally in 1999 and 2000,” said Emanuel. “Could it result in a very strong parabolic-type surge across the entire stock market?”
Citi’s Levkovich said investors tend to sell momentum as much as they buy momentum.
“The moves we’ve seen in stock prices, where they can double or triple in a day,” he said. “The amazing PSPC show, the crypto thing – a lot of them are signs of too much liquidity generating speculative behavior.”
Nonetheless, the market rewards have been enormous. Tesla, for example, is up 630% since March 23, while Etsy is up more than 520%, Freeport-McMoRan 540% and L Brands 500%.
Equities haven’t really been challenged by bonds against investment dollars either, even with the recent surge in yields.
“Why at age 20 or 30 would you want to buy a fixed income investment if inflation expectations are 2% and the Fed tells you it won’t stop with liquidity as long as inflation? will not be above 2% on a lasting basis, “said Emanuel of BTIG.” Because real returns are so low, now is always a good time to invest in equities. “
The yield on benchmark 10-year Treasury bills has been rising in recent times as the promise of the latest fiscal stimulus has improved growth prospects.
Economists predict the economy could grow 6% this year. The 10-year yield, which moves opposite price, was around 1.53% on Thursday, a far cry from its year-long low of 0.50%, but below its recent high of 1 , 61%.
Market now in mid-cycle
Sam Stovall, chief investment strategist at CFRA Research, expects the market to rise this year.
He also says it should see a bigger correction than the market sell-offs that took place from mid-February until last week. During this period, the then S&P 500 sold nearly 6%, while the Nasdaq fell more than 10%.
“When I look at all the historical facts that say stocks are overvalued, it scares me,” Stovall said. “S & P’s market capitalization is 140% of nominal GDP and S & P’s average is 62%.”
The market has also seen only one major correction since it took off in March.
“We’re over 20% above where we were the last time we had a significant drop, which ended on September 23,” Stovall said.
The market is now in a mid-cycle period, “after a rapid and furious” recovery “regime,” Bank of America found. Company strategists have said this should mean a period of continuous gains.
In this type of market environment, “investments typically exceed consumption, rates rise and ‘good inflation’ picks up,” Bank of America said, referring to capital spending.
This phase could end when “good” inflation turns into “bad” inflation, with prices rising too much and affecting margins. Bank of America strategists say this period may also be longer than the nine-month average.
Cyclical and value stocks are expected to continue to outperform. Wall Street strategists have a median target of 4,100 on the S&P 500 for the end of the year.
Citi’s Levkovich said he doesn’t expect the market to go much further than it has already this year. He expects the S&P 500 to trade between 3600 and 4000 – very close to its current level – and end the year at 3800, the lowest forecast in CNBC strategists survey.
On Thursday, the S&P 500 closed at 3939.
“People are positioned very optimistically, which prevents downside risk in the market,” Levkovich said. But neither can the market win like it did when technology and growth were the leaders.
When the tech and internet growth names were still the leaders, a handful of stocks were responsible for most of the index’s gains. Some of these names, like Apple and Amazon, suffered double-digit declines.
The energy and materials sectors have doubled in price since last March, while industry and finance are up about 95%. Technology is up about 83%. Meanwhile, communications services, including internet names, are up about 72%.
“If you lose the leadership of the big dogs, it’s going to dampen the market, even if the other guys go up,” Citi’s Levkovich said. “They’re not as big as huskies … the ratings are different if you lose some of the big names in tech.”
Later in the year, the market could fight cyclicals and value stocks as leaders, Levkovich said.
“We could be in a position where later in the year we might see some of the expectations for value and cyclicals disappoint, and then I think you’ll see the rotation come back to growth,” he said. .
Just as the course of the economy will be decided by the evolution of the virus and the success of vaccines, the stock market will be pulled by the same factors.
“Everyone thinks the world will be a lot better in the second half,” said Levkovich. “If there is a hiccup – let’s say it’s a Covid epidemic where we haven’t contained it enough – that would be a disappointment. “