Bad news doesn’t seem to bother Wall Street these days.
Coronavirus-related deaths and hospitalizations are skyrocketing, and many companies have shelved plans to return to the office. Staff shortages and supply chain bottlenecks persist, while consumer confidence has plummeted.
And yet, the stock market continued its quietly remarkable year in August, posting its seventh consecutive monthly increase. The S&P 500 Index is up more than 20% for 2021 and has more than doubled in value since it bottomed in March 2020. The market closed at a record high 53 times – the most at this point of the year since 1964, according to LPL Financière.
It’s a rise that seems out of step with the reality of the virus in many parts of the country, but most investors are confident in two things: The Federal Reserve will keep interest rates at their lowest levels, perhaps. be for years to come, and the federal government will not hesitate to spend heavily to maintain the recovery.
“I hate to say it,” said Ed Yardeni, longtime market analyst and chairman of stock market research firm Yardeni Research. “But it looks like we are learning to live with this virus and the market certainly has.”
Not everyone expects the rally to continue unabated. And any disruption in investor expectations for interest rates and government support – or a significant slowdown caused by Delta or some other variant – could change the still sunny outlook.
But so far, the lingering pandemic has driven up the stock prices of companies whose profits are directly tied to it – Moderna’s 260% rally this year has made it the top performer on the S&P 500 – and those that are doing well. positioned to profit from the disorderly economic recovery, such as metal manufacturers, energy companies and semiconductor manufacturers.
The magnitude of the boom was clear in July. Second-quarter results were expected to be generally strong, but exceeded expectations: Nearly 90% of companies beat analysts’ forecasts, the highest level of “beating” on record, according to Refinitiv data dating back to 1994.
“The earnings numbers were spectacular,” said David Kelly, chief global strategist at JP Morgan Asset Management. “You had an extraordinarily strong rebound after the recession. “
Typically, periods of strong economic growth and skyrocketing profits are also accompanied by high or rising interest rates, which tend to act like a headwind for stocks. But not this time.
Despite higher-than-expected inflation, the Federal Reserve has indicated it intends to keep rates low even as it prepares to slow – or “decrease” – money printing and buying. of obligations she started at the start of the pandemic.
In a closely watched speech last week, Jerome H. Powell, Chairman of the Federal Reserve, stressed that rate hikes are far away and that the Fed is aware of the risk posed by the Delta variant of the coronavirus. His comments helped catalyze a new rush to market.
“I think investors can live with tapering because everyone knows it’s going to happen and it’s been talked about so much,” said Ryan Detrick, chief market strategist at LPL Financial, a brokerage and advisory firm. in investment. “But knowing that rates are going to stay a bit lower for longer, that’s the icing on the cake with an economy that, overall, continues to improve.”
Such widespread optimism is a far cry from the reaction of investors when the pandemic first struck. Stocks plunged 34% as the extent of economic risks finally dawned on them in early 2020.
Government and central bank intervention calmed the panic. The Federal Reserve cut interest rates to near zero and started pumping money into financial markets. The Trump administration and Congress quickly decreed billions of dollars in relief spending for businesses and households, shielding the economy from the worst damage and sparking the market rise.
The initial rally centered around stocks that were poised to thrive in a work-from-home world, including online retailers like Etsy, home exercise company Peloton, or suddenly ubiquitous services like Zoom Video.
But the equity surge widened in November, when favorable vaccine results raised expectations of an economic recovery. Businesses, including airlines, casino companies, and commodity producers, have also started to soar.
As much as the stock market loathes uncertainty, the shifting threat of the Delta variant has failed to live up to investor confidence that Washington will offer a lot of support no matter what.
When the S&P 500 rose this month to double its Covid-era low on March 23, 2020, it was the fastest 100% rise for the index since World War II, according to Yardeni Research. In about 17 months, the rally created nearly $ 20 trillion in stock market wealth.
Besides the sheer angle of the climb, analysts were struck by the mildness of the rally. The S&P has not suffered a 5% decline since last October, according to Mr. Detrick. Even with a 0.1% drop on Tuesday, the market is only a day off its most recent record.
This won’t last forever, of course. The seemingly effortless upward slide in the market is expected to cause turbulence – and some experts believe it likely will over the next year or so.
Mike Wilson, chief US equities strategist at Morgan Stanley, said he believed there would be some sort of “comeupance” as the economic situation changed.
The economy, which is expected to grow faster than 6% this year, is expected to slow significantly. Goldman Sachs recently cut its growth forecast for 2021 to 6% from 6.4%, citing the impact of the Delta variant. Slower growth could mean less impressive business profits.
And even if the Federal Reserve doesn’t actually raise interest rates, its support for the stock market will weaken by curtailing the ticket printing and bond buying programs that investors have become accustomed to.
“We believe the extraordinary fundamentals are about to deteriorate and we’re going to see growth start to slow down significantly,” Wilson said. “And we’re going to see the Fed start cutting housing.”
Both factors lend themselves to a drop in stock prices. Mr Wilson said he believed the market was due for a correction – Wall Street’s term for a decline of 10 percent or more.
But, he said, the sell could be worse the more the market goes up and the more stock prices go out of sync with standard measures of value.
“This correction can be greater than 10 percent,” Wilson said. “It can be 10 to 20.”