It took just 175 days for the S&P 500 index to go from peak to trough to peak, a recovery that has come faster than any comparable one in the past.
Bloomberg: The S&P 500 popped above its highest-ever closing level, and stands poised to erase its bear-market plunge in record time. But as stirring as the recovery has been, it’s also a case study in how stock benchmarks can be misleading when it comes to the experience of investors at large.
It took just 175 days for the index to go from peak to trough to peak, a recovery that has come faster than any comparable one in the past. The previous 12 cycles that saw stocks recover from a drop of at least 20% took an average of four years. Since bottoming in March, the S&P 500 has risen about 50%, with more than 40 of its members doubling. More than $12 trillion dollars of share value that vanished is now all but restored.
The S&P 500 rose as much as 1.6% to 3,387.89, briefly surpassing its Feb. 19 closing record. It pulled back in the final half hour of trading to end at 3,380, 0.2% shy of the all-time high.
The lastest push has come amid an earnings season that is a microcosm for the sentiment that has driven the rally. Second-quarter U.S. profits have been by any measure terrible, down 33% from a year ago, according to Bloomberg Intelligence. But with analysts forecasting a decline of 44%, they weren’t as bad as feared, with more than 80% of companies beating estimates.
As powerful as momentum has been at the rally’s core, around the edges it has been painfully thin. Only about a third of S&P 500 companies are in the green since mid-February, and the average stock in the index is still down 6%. Energy companies are doing worse, nursing losses of more than 20%.
In short, amid a virus that has laid bare and worsened the stark divisions that define life in America, the stock market has been a symbol for inequality. While its winners list is crowed with automated, asset-light tech companies, industries that have generally shouldered a greater share of employment — transportation, retailing and energy — are at the bottom.
“If you’re investing in the index, you are benefiting from the fact that these three, four, five companies are pushing the overall index,” said Jeff Mills, chief investment officer for Bryn Mawr Trust Co. “If you’re in that area of the market you’ve done well. If you’re underweight that corner of the market, you’ve lagged, no question.”
Return divergences are everywhere. Tech stocks are beating energy by 60 percentage points this year, the widest gap since at least 1990. With investors flocking to companies with the least-bad earnings, momentum in Russell 1000 growth shares reached a record high versus value stocks.
None of which makes the rebound in capitalization-weighted benchmarks any less miraculous. To grasp how much has changed, consider how bad the devastation was, back in the crisis days of February and March.
One under-appreciated fact of the downdraft is that at its bottom, with the S&P 500 off 34%, the average constituent had fallen a lot more — 44%. After a slow and grinding bull market that needed more than 11 years to rev up, it took just five weeks for 98 giant American companies to lose half their value, in what was easily the most violent selloff since the Great Depression.
Thanks mainly to rallies in technology stocks, and aided by Federal Reserve stimulus and frenetic buying by individuals, it took less than six months for the S&P 500 to get back above its Feb. 19 closing level.
The narrow leadership in stocks shows how widespread insecurity still is over the fragile economy, with millions still unemployed and Covid-19 case counts increasing nationwide. Tech giants, armed with strong balance sheets and products that enable social distancing, have dominated the gains. The tech-heavy Nasdaq 100 reclaimed its all-time high in early June and has since scored a dozen more records.
The big five — Amazon.com Inc., Apple Inc., Facebook Inc., Alphabet Inc. and Microsoft Corp. — have seen their combined share values exceed their February peak by 23%. By contrast, the rest of the market is still 7% below the high mark. Also left behind are the Dow Jones Industrial Average and the Russell 2000 Index, each of which is short by around 5%.
Helping propel the swift turnaround was monetary and fiscal support, where the Federal Reserve has pulled out all the stops and Congress works on hashing out a new stimulus package. At the same time, better-than-feared economic data and corporate earnings instilled optimism that a recovery is taking shape.
“The market has looked through a lot of key risks, the virus being one of them — through to what kind of path we’re going to be on for the recovery,” said Jon Adams, senior investment strategist at BMO Global Asset Management. “It’s really a policy-driven market at this point.”
The speed of market bounce caught many by surprise, at least going by Wall Street expectations. Among strategists tracked by Bloomberg, most saw their year-end targets surpassed by the S&P 500. Many of them warn that equity gains may have been exhausted for the year, citing everything from stretched valuations to the uncertainty over the presidential election and the pandemic. At an average 3,117, their forecasts for the index pointed to an 8% decline through December.
Breakouts like these usually herald more gains. In prior cycles when the S&P 500 broke even following a bear market, stocks kept rising in all instances. On average, the index added another 71% before peaking.
Those facts haven’t kept investors from pulling money out of equity-focused exchange-traded and mutual funds. Since the market’s trough in March, almost $80 billion has been withdrawn, according to data compiled by Investment Company Institute.
“I have just been amazed by the wall of worry we have and the defensive behaviors,” Jim Paulsen, chief investment strategist at the Leuthold Group, said in an interview with Bloomberg Television and Radio. “It’s hard to see what’s going to change that. But I think one thing that would certainly do that, or help, would be a new high in the overall S&P 500.”
Improving sentiment is likely to prompt investors to branch out to small and mid-cap stocks, potentially building a better foundation for the market, according to Chuck Cumello, president and chief executive officer of Essex Financial Services.
“As more money flows into the market, especially if we see more breadth in it, that generally will set things up for a nice positive run,” Cumello said. “That will be healthy.”