Monday’s market action was a microcosm of the way the stock market has behaved in 2020.
Sure, factors other than the virus have moved the market this year; Ultra-low interest rates, enormous additions to the money supply (from both monetary and fiscal stimulus), growing hopes that the world will soon see billions of COVID vaccine doses, and a clear path to an economic and corporate earnings rebound from second-quarter data have all powered the S&P 500 to new highs. But this piece will not track the S&P 500 — up 56% from the March 23 low — but it will track the performance of cyclical stocks.
How to Read the S&P 500
The bifurcated S&P 500 has reached its current level mostly because FAANG stocks plus a few other big tech names, all of which either benefit from the at-home environment or can use their secular growth themes to power through economic headwinds, have lifted the index. The Nasdaq 100 is up 73%. The FAANG plus Microsoft MSFT, Salesforce CRM and Tesla TSLA represent several trillion dollars of market cap and are all up explosively this year. Healthcare and semiconductors, a kind of cyclical-growth class of stocks, also represent a large chunk of the market cap-weighted S&P 500.
Large cap cyclical stocks have rebounded as well, although many of those stocks are still far below their all-time highs. They are economically sensitive and the pandemic, which is still nowhere near over, continues to threaten the real economy. So this piece will use the Vanguard S&P 500 Value etf VOOV — home to both cyclical and defensive names — as the ultimate barometer of the correlation between the virus and the market.
Monday as a Microcosm
Monday, the S&P 500 was down 0.1% by 2:30 EDT, as tech stocks rose 1% at one point in the day, and cyclical value fell more than 1% in some sectors. New daily U.S. virus cases in the past few days have been around 45,000, up from 34,000 recently. The summer peak was 77,000. The news flow on Monday included a comment to a reporter from the FDA commissioner saying he will consider granting emergency use of COVID vaccines before testing trials are finished. "The major indices started out the week on a mixed note, as the violent protests in Portland and the bleaker COVID numbers have been weighing on investor sentiment,” wrote Ken Berman, Strategist at Gorilla Trades in emailed remarks to reporters.
Tracing the Virus and Stocks in 2020
From the all-time highs for most stocks in late February to the bear market low of March 23, the value etf fell 37%. From the rebound on March 23 to June 8, a date that came 3 days after a net 2.5 million U.S. jobs were added vs. expectations for a loss of 8 million, the etf rose 45%. And the fund had begun to finally outperform the broader market for weeks leading into early June. By early June, the 10-Year Treasury yield, which seems to find a 2020 home at around 0.7%, had spiked to above 0.9%, as investors ditched the bond in expectations of higher inflation and earnings momentum. Yields rise when prices fall.
In that time span, daily new virus cases in the U.S. had already found an April peak of 36,000, before falling to 17,000 near the beginning of June. Not only had stimulus held over households, small businesses and corporations for the time being, but the aggressive downward bend of the virus curve was signifying we were beginning to exit the woods. Or so we thought.
From June 8 to June 26, the value etf fell 12%, with consumer discretionary in correction territory and oil and banking back in bear markets. New daily cases had risen back to 36,000 in that time. Second-quarter earnings, a sharp decline in unemployment (down to 10% from above 15%) and consumer spending data took stocks up in all sectors up. But since June 26, the fund is up almost 11%. Peak virus cases did come in in July, but earnings were rolling in positively and market participants were expecting another bout of fiscal stimulus, which we haven’t gotten yet. Virus cases fell to that 34,000 number in August. From June 26 to August 28, the value fund rose almost 12%.
Unfortunately, some medical experts expect that third wave of infections when the weather gets cold. That’s a major unknown and while investors hate uncertainty, the market must operate on factors that it can at least measure in terms of probability and magnitude, one reason investors have moved into many stocks on solid earnings. Downside may be potentially limited, as value stocks are trading at earnings multiples (valuations) that aren’t very high compared to the ultra-low interest rates. Lower rates created higher multiples, which are indeed much higher than they were when the 10-Year treasury yield was above 1% pre-pandemic.
Still, an aggressive round of lockdowns across the country would push hard against any new fiscal stimulus in September, stimulus small businesses badly need. Companies have already raised $1 trillion of new debt this year, leaving interest rates — which can’t fall much from here — and added liquidity to have a waning marginal impact on employment.
Next order of business for the market: watch fiscal stimulus and the virus come fall.