Comparing things to the last time the S&P 500 was here.
With the S&P 500 futures up 0.62% preopen, and the S&P 500 at 3080, up 37% from the 3/23/20 low, which was just 50 trading days ago, it is a time to take stock.
The last 10 days have seen widespread protests in major cities across the U.S. in response to the death of George Floyd. People have been hurt and killed, many have been arrested, and there has been a lot of destruction coincident with the protests. The rally in stocks seem incongruent when looking at the economic and emotional pain of the country. In the end, however, the stock market is an objective discounting system. TPA prints Benjamin Graham’s words on each report, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
TPA wanted to see what has changed since the last time the market was at this level. So much has occurred in a relatively brief span of time that it is difficult to know where to start and how to make comparisons, but TPA decided to use the S&P 500 close of 3078 on 11/4/19 as a marker to see what has changed since stocks were last at this level (see the chart below).
The table that follows compares 11/4/19 to 6/3/20 using the following:
- Covid-19 statistics
- U.S. Economic data
- The Federal stimulus
- Major U.S. market indexes
- Major U.S. market sectors
- Non-equity benchmarks
- Major World markets
What Has Gone Wrong
Stocks were consistently marching higher when the Coronavirus made itself known. As of last night, the total cases worldwide and in the U.S. stood at 6,474,559 and 1,881,256, respectively. The number that have died from Covid-19 worldwide and in the U.S are 382,921 and 108,062, respectively.
Much of the U.S economy was shut down for 2 months and is only now tentatively reopening. Retail Sales are down an astounding 23% or $121 billion. Unemployment stands at 14.70%; a 320% increase from the 3.50% number on 11/4/19. The 10-week cumulative number for new unemployment claims is over 40 million; a historic record.
Crude has rallied from a never-before-seen negative levels the 3rd week in April to 37.47, but it is still down 33% from the 56.54 close on 11/4/19.
The Federal Solution
The U.S. government’s answer to the crisis has been also been historic. The FED’s balance sheet has increased to a record $7 trillion, which is a 75% increase from the $4 trillion that existed on 11/4/19. PPP has loaned over $500 billion to businesses to keep people employed. The IRS has sent out over $200 billion in stimulus checks to American taxpayers.
Money is cheap now as rates have fallen to their extremes. The Fed Funds is basically 0.00; the effective rate is 0.05. The U.S. 10-year yield has fallen to 0.69% from 1.77% on 11/4/19.
S&P 500 Overview
After rallying steadily for the early months of 2020, the S&P 500 dove 34% bottoming on 3/23/20. The S&P 500 has now rallied and stands approximately where it was on 11/4/19. The Russell 3000, which includes Small Cap stocks, which have fared worse in the downdraft, is a bit lower. The Nasdaq, with its heavy TECH weighting is by far the best major index; closing Tuesday 17% higher than the close on 11/4/19.
The winners since the S&P 500 was last at this level are mostly those areas least affected by the shutdown; TECH +15%, Healthcare +9%, Communications (which includes stocks like FB, GOOGL, DIS, and NFLX) and Consumer Discretionary (which includes companies that could function during the shutdown like AMZN and WMT). The loser, unsurprisingly, were those areas that were hurt by the shutdown; Energy -33%, Financials -19%, Transportation -15%, Industrials -15%, and REITs (especially hurt by Commercial and Office REITs) -14%.
What’s Next For The S&P 500
As discussed in previous World Snapshots, investment managers are paid by their clients to stay invested. So, managers will do their job and own stocks. The only way the indexes can keep going down is if there are liquidations; investors take assets away from investment managers. So far, this has not happened. Managers who sold in March anticipating liquidations, had to buy back stocks when they realized that they had too much cash in their portfolios.
As also discussed above, stocks discount a future world. Right now, investors see the parabolic increase in Covid-19 cases stalling, an economy opening up, and a federal government with infinite resources willing to do whatever it takes to return to normalcy.
The situation may not be great for the average guy stuck at home, with or without a job, and watching violent riots in the street, but as long as there are not mass liquidations, the FEDs keep up their support, and Covid-19 cases trends lower, the market will be stable or go higher. Of course, there really is a limit to how much the FED can do if the economy cannot open up, even if Covid-19 cases come under control, the response by consumers is uncertain. TPA clients should play along with the market, but watch for cracks in the present bullish argument.
- Covid-19 cases rising
- Liquidations from asset managers
- A cautious and tepid return to life for the majority of Americans
- The Federal government beginning to waver in its support
Jeff Marcus founded Turning Point Analytics (TPA) in 2009 after 25 years on trading desks and 13 years as a head trader to provide strategic and technical research to institutional clients. Turning Point Analytics (TPA) provides a unique strategy that works as an overlay to clients’ good fundamental analysis. After 10 years of serving only large institutions, TPA now offers its research services to mid and small managers, RIA’s, and wealthy sophisticated individuals looking for a way to increase their returns and outperform their peers.