S&P 500 hits record high on a surge in investor optimism
August 24, 2020
Equity investors continue to express cautious optimism on the direction of the economy and progress with the virus, with the S&P 500 IndexTM hitting a fresh record high last week and has gained in four consecutive weeks. The S&P 500 has now gained 52% in the 105 days since the March 23 low, which had seen a loss of 34% in the 33 days following the February 19 high. This is the fifth time in history when the S&P 500 made a record high during a recession, and in the previous four occasions (1961, 1980, 1982 and 1991), the recession ended in the following month, per Strategas.
The market recovery has been heavily influenced by the top largest five members of the S&P 500 (AAPL, MSFT, AMZN, FB and GOOGL) which have gained an average of 51% this year, while the remainder of the S&P 500 have averaged a loss of 3%. Participation in the rally has been limited, with 40% of companies are more than 20% below the high. Given their elevated valuations, the top five are unlikely to be able to carry the market to the same degree going forward, and improved participation will be required.
Investor sentiment has shifted, with substantial optimism now embedded into the equity markets, driving valuations to the highest level since the technology bubble. Global fund managers are more optimistic on the market than any time since the pandemic began per a Bank of America survey. Short interest as a proportion of market capitalization for S&P 500 fell to 1.8%, the lowest since Goldman Sachs began tracking the data in 2004 and compared with an average of 2.5% over the past 15 years.
Markets are set to open the week higher on news the FDA will grant emergency use authorization of convalescent plasma to treat coronavirus, as there are signs with may be effective in lessening the severity or shortening the duration of the illness. The Trump administration is considering fast tracking the vaccine developed by Oxford University and AstraZeneca for use in the U.S. in the next few months.
Republicans and Democrats continue to blame each other for stalled negotiations on the fifth coronavirus relief bill, as the two sides remain far apart. Negotiations are unlikely to start until after Labor Day, with a deal unlikely until late September when Congress will have to pass a stopgap measure to keep the government open. The Republican National Convention will be held this week, as Joe Biden holds a strong, but narrowing lead in the polls and betting markets.
Recent data suggest that the uneven nature of the recovery is creating a “K”-shaped recovery, continuing the trend of a widening of the pay and wealth gap. Professionals are largely back to work, or were never impacted, with wealth at record highs given the stock and housing market. Blue-collar and service workers had seen real wages stagnant for years due to automation and have been particularly hard hit from the shutdown. A recent bounce in unemployment claims suggests this group remains vulnerable. This could overstate the degree of pent-up demand by consumers, as those with high discretionary income have continued to spend. This gap is shown in retailers as well, with big-box retailers showing a surge in demand, while 20% of small businesses remain closed and the remainder experiencing a decline in sales of 30%.
The growth vs. value gap reemerged last week, as did the large vs. small cap. Yields fell, and spreads tightened, resulting in near-record-low borrowing rates for issuers. The dollar bounced modestly, though remains at a two-year low with continued euro strength.
What to Watch
A busy week of economic data awaits, including consumer confidence and new home sales on Tuesday, durable goods on Wednesday, revised GDP and pending home sales Thursday, and PCE deflator, personal income and spending and consumer sentiment on Friday.
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