- The S&P 500 is just 16% off its all-time high and up 29% off its low a month ago despite a pandemic that’s cost 26 million jobs.
- But stocks don’t appear to be handicapping a quick resurgence in the economy when looking at the weak performance of “early cycle” groups such as autos, banks, consumer durable goods and retail.
- Big, steady secular-growth stocks in technology, healthcare and consumer staples are holding things together.
- Amazon’s $1.2 trillion market value now accounts for more than 40% of the entire value of the S&P 500 consumer-discretionary sector.
Why isn’t the stock market much lower?
This question is occurring to plenty of observers right now, given the apparent contrast between economic realities and equity performance.
A pandemic-driven economic catastrophe of unprecedented speed has cost more than 26 million jobs, which to many seems unreflected in an S&P 500 index that’s up 29% from its low a month ago, down a mere 16% from a record high and resting near levels from late summer 2019 – a time when we were at full employment and record corporate profitability.
Even some on Wall Street are remarking on this perceived Wall Street-Main Street disconnect.
Cantor Fitzgerald strategist Peter Cecchini last week argued, “The equity market just isn’t getting the joke. Three factors make this rally appear somewhat ridiculous because the likely extent of the slowdown will be severe relative to historical experience for three reasons: 1) a pandemic whose duration is unknowable, 2) an oil shock whose impacts on earnings will be deflationary, and 3) an already fragile economy as indicated by an inverted yield curve and already contracting loan volumes.”
Credit Suisse’s Jonathan Golub notes the S&P 500 has been at the current 2800 level a couple of times in recent years, comparing the fundamental context for each visit. When the S&P traded here in both January 2018 and March 2019, forecast earnings over the next year were appreciably higher (meaning stocks now look more expensive) and credit spreads are much wider now (suggesting a riskier environment).
Only when comparing valuations on the profit projections two years out does today’s market look roughly in line with the prior stops at 2800. And it’s probably fair to assume that today’s consensus forecast calling for 2021 earnings growth well above 2019 levels is unadjusted for the full realities of the economic shock underway.
Certainly, the trillions in Federal reserve asset buying has helped enable the rally in risk assets that has lifted equities off their lows and bolstered valuations.
Market internals tell the true story
Yet the way the S&P has returned to 2800 doesn’t truly suggest that the market has rushed to anticipate a roaring economic revival.
If stocks were handicapping such a quick resurgence in the economy, one would expect “early cycle” groups such as autos, banks, consumer durable goods and retail to lead the market. This is the opposite of what’s going on.
Binky Chadha of Deutsche Bank notes that the firm’s early-cycle long-short basket of stocks “after falling massively during the sell-off has continued to fall during the rally.”
Similarly, the Direxion MSCI Cyclicals Over Defensives ETF, a small fund that goes long economically sensitive stocks and short non-cyclical names, has had a fairly feeble bounce after a 38-percent collapse, badly trailing the S&P on the rebound.