The S&P 500 Eclipses Prior High – August 24, 2020
The unemployment rate is above 10% (U.S. BLS). Though declining, layoffs remain at elevated levels (Dept of Labor) amid the lingering pain caused by the Covid recession.
Yet, headlines of new highs for the major indexes would suggest the economy is doing just fine. It’s not.
Closing at a fresh record on Friday, the NASDAQ Composite2 is up an impressive 26% year-to-date (MarketWatch), while the broader-based S&P 500 Index3 eclipsed its prior February 19 high of 3,386.15 on Tuesday. It closed at a new record of 3,397.16 on Friday (MarketWatch).
Yet, industry performance has been uneven. Strong gains in tech, which so far has been more insulated from the pandemic and recession, has led the NASDAQ higher. But economic uncertainty has kept pressure on economically sensitive cyclicals (StockCharts).
The Dow Jones Industrial Average1 (DJIA) has not taken out its high. Yet, since bottoming, it just had its best 100-day gain (up 50%) since 1933 (Barron’s—market bottom of March 23).
It’s difficult to quantify with exact certainty why the major indexes have had such a robust rebound. But let’s consider some of the factors.
- Fed stimulus and an open-ended commitment of additional stimulus,
- extraordinarily low interest rates,
- Fed guidance that low rates will continue for an extended period,
- an improving economy,
- a rollover in new daily Covid cases (Johns Hopkins),
- a smaller-than-expected drop in Q2 S&P 500 profits (Refinitiv),
- talk of a vaccine, and
- investors may simply be looking past 2020.
New fiscal stimulus has run into roadblocks on Capitol Hill, but the inability to find common ground has yet to derail stocks.
We also recognize that risks never completely abate. A quick survey of the landscape reveals that pitfalls aren’t hard to find.
A new stimulus plan may not come to fruition, the sharp economic rebound appears to be slowing, a second Covid wave in the fall is a risk, and tensions between the U.S. and China are lingering.
In the minutes released from the late July Fed meeting, officials agreed that “the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term.”
Given the massive amount of uncertainty, the adage that bull markets climb a wall of worry seems to describe today’s environment.
While today’s highs may create market vulnerabilities, recent market action suggests the economic recovery is on the right track, even if month-to-month activity is uneven.
Created 2020-08-24 15:13:30