Stocks Are Melting Up Again. Here’s What’s Driving the Gains

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With coronavirus concern all but in the market’s rear-view mirror, stocks are continuing their run, as the economy hums along, tech and services keep impressing and investors pour cash into ETFs.

From Jan. 17 to 31, the S&P 500 fell 3%. The coronavirus had struck and the death toll rose, and the World Health Organization declared the disease a global emergency. Chinese shoppers were staying home (and still are), prompting U.S. companies operating in China to shut down stores and manufacturing plants.

Since Jan. 31, the index is up 2.5%. and the S&P 500 gained 1.76% on Tuesday, a huge upswing for one day.

Earnings season has been relatively strong, with impressive quarters from Amazon AMZN and Microsoft MSFT, which are up 9.6% and 6.5% since their respective earnings reports. Although both stocks have extremely outsized impacts on the S&P 500, Apple shares have been range-bound on coronavirus fears. Google GOOGL and Facebook FB fell after they reported earnings.

Here are the trends driving money into stocks.


“This trend comes from two main factors,” wrote strategists at Unigestion Asset Management, which manages more than $22 billion.

“The increasing weight of passive investment that tends to increase the momentum effect, as well as stock concentration and the cost of being a contrarian.”

Unsurprisingly, the State Street Global Advisors S&P 500 ETF SPDR is up 3.31% in the past month, as the index has risen 1.73% in that span.

Flows into ETFs and indexed mutual funds have been a theme in the past decade or so, providing support for the current bull run, the longest in American history.

But something has to prompt the hunger for stocks. Sure, there’s a roughly 25% chance of a recession on a rolling-12-months basis, according to many strategists, but that was closer to 35% several months ago. GDP growth is expected to reaccelerate in 2020 over 2019, which saw growth of 2.1%.

Adding to the growth picture, not only has the Federal Reserve made clear it will lower rates when necessary, but Chinese authorities recently injected fresh liquidity into that nation’s economy.

“The folks printing the money are going to continue to for the foreseeable future, and the Chinese stimulus overnight was an example of how quickly the global central banks can intervene,” wrote Tony Dwyer, chief equities strategist at Canaccord Genuity.

Some strategists say the current level of the S&P 500 -- the average earnings multiple is 18.5 -- is too high late in the cycle. (The 10-year average is 15.)

But as John Ham, adviser at New England Investment and Retirement Group, told TheStreet in early January, "Everybody would love to wait for a drop and everybody is always saying you can buy lower, but in reality you have to allocate funds.” He added, “You have to be invested.”

Services Companies 

Unigestion added that the “rising weight of services in the global economy” recently has been a structural driver of stock gains.

For the U.S., services now represent about two-thirds of economic output. The economy is growing at a decent clip, even as manufacturing activity — one-third of output — has declined since August on a year-over-year basis.

And those services companies — especially big tech — can easily buy back their own stock. “Global corporates are much better equipped than small ones to leverage the low-yield environment (financial engineering for buybacks),” Unigestion said.

Google, in its earnings report Monday, said it bought back $6 billion of shares, beating many analysts’ estimate of $4 billion for the quarter. Google missed on revenue and operating margin and cleared EPS estimates on the strength of its buyback program.

So what should investors expect going forward? While the broader bull market may still have juice left in it, “We’re going to have some chop [volatility] in the next few weeks while we find out what’s happening” with the coronavirus,” Jim Carney, founder and CEO of Purples Partners, recently told TheStreet. 

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