Bad news doesn’t seem to bother Wall Street these days.
Coronavirus-related deaths and hospitalizations are on the rise, and many businesses have shelved their plans to return to the office. Lack of staff and supply chain bottlenecks linger, time consumer confidence plummeted.
Still, the stock market continued its quietly remarkable year in August, posting its seventh-month rise in a row. The S&P 500 index is up over 20 percent for 2021 and has more than doubled in value since bottoming out in March 2020. The market closed at a record high 53 times – the highest at this point of the year since 1964. LPL Financial.
It’s an uptick that hasn’t kept pace with the reality of the virus in many parts of the country, but most investors are sure of two things: The Federal Reserve will likely keep interest rates at their lowest for years to come, and the federal government will not hesitate to spend big to continue the recovery.
“I hate to say it,” said Ed Yardeni, a long-time market analyst and head of stock market research firm Yardeni Research. But it seems we are learning to live with this virus, and so is the market.”
Not everyone expects the rally to continue unabated. Any disruption to investors’ expectations about interest rates and government subsidies – or a massive slowdown caused by Delta or another variable – could change the ever-sunny outlook.
But so far, the ongoing pandemic has pushed up the stock prices of companies whose profits are directly tied to it – Moderna’s 260 percent rally this year made it the best performer of the S&P 500 – and manufacturers like metals in a position to profit from the messy economic recovery. , energy companies and semiconductor manufacturers.
The breadth of the explosion was clear in July. Second-quarter earnings results were expected to be strong overall, but they blew expectations: Nearly 90 percent of companies beat analyst estimates, the highest level of “beat” on record, according to Refinitiv data dating back to 1994.
“The earnings numbers were fantastic,” said David Kelly, global chief strategist at JP Morgan Asset Management. “You have had an extraordinarily strong recovery from the recession.”
Typically, periods of strong economic growth and fiery profits are accompanied by high or rising interest rates, which tend to act as a headwind for stocks. But not this time.
Despite higher-than-expected inflation, the Federal Reserve has signaled its intention to keep rates low even as it prepares to slow or “cut down” the money printing and bond buying that began at the start of the pandemic.
During a closely watched speech last week, Federal Reserve chief Jerome H. Powell stressed that rate hikes are a long way off and the Fed is sensitive to the risk posed by the Delta variant of the coronavirus. His comments helped fuel a new upswing for the market.
“I think investors can live with contraction because everybody knows it’s going to happen, and there’s been a lot of talk about it,” said Ryan Detrick, chief market strategist at LPL Financial, a brokerage and investment advisory firm. “But knowing rates will stay slightly lower for longer is the cherry on top with an economy still recovering overall.”
Such widespread optimism is far from how investors reacted when the pandemic first hit. Stocks fell 34 percent as the scale of economic risks finally loomed over them in early 2020.
Government and central bank intervention quelled the panic. The Federal Reserve lowered interest rates to near zero and began pumping money into the financial markets. The Trump administration and Congress quickly enacted trillions of dollars in aid spending for companies and households, protecting the economy from the worst damage and kicking off the market boom.
The initial rally focused on stocks ready to thrive in the work-from-home world, including online retailers like Etsy, services that are suddenly ubiquitous like home workout company Peloton or Zoom Video.
However, stock gains widened in November as positive results on vaccines boosted expectations of an economic recovery. Businesses, including airlines, casino companies, and commodity producers, also began competing higher.
While the stock market hates uncertainty, the shifting threat, the Delta variant, did not match investors’ confidence that Washington would offer plenty of support no matter what.
According to Yardeni Research, when the S&P 500 surged this month to double its Covid-era low on March 23, 2020, it was the fastest 100 percent increase for the index since WWII. In about 17 months, the rally created nearly $20 trillion in stock market wealth.
Apart from the sharp angle of the uptrend, analysts were also impressed by the smoothness of the rally. According to Mr. Detrick, S&P has not seen a 5 percent decline since last October. Even with a 0.1 percent drop on Tuesday, the market is just a day away from its latest record high.
Of course it won’t last forever. The market’s seemingly effortless upswing will cause turbulence – and some experts think it’s likely at some point in the next year.
Mike Wilson, U.S. equity strategist at Morgan Stanley, said he believes there will be some kind of “improvement” as the economic picture changes.
The economy, which is expected to grow by more than 6 percent this year, is expected to slow down. Goldman Sachs cut its 2021 growth forecast from 6.4 percent to 6 percent, citing the impact of the Delta variant. Slower growth could mean less impressive corporate earnings.
And even if the Federal Reserve doesn’t actually raise interest rates, its support for the stock market will weaken as it reduces the money-printing and bond-buying programs that investors are used to.
“We think the extraordinary fundamentals are about to fail and we will see growth begin to slow significantly,” Mr Wilson said. “And we’re going to see the Fed start removing accommodation.”
Both factors help drive down stock prices. Mr Wilson said he believed the market needed a correction – Wall Street’s term for a 10 percent or more drop.
But he said sales could get worse as the market rises and stock prices rise more than standard measures of value.
“This correction could be more than 10 percent,” said Mr Wilson. “It could be between 10-20.”