In what was the shortest bear market in history, the Standard & Poor (S&P) 500 ignored the pandemic and hit a record high Tuesday. A combination of tech stock surges and strong retail numbers helped close the index to 3,389. This also means the index has recovered from its pandemic-related losses this year. The previous high was 3,386.15 recorded in February earlier this year.
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S&P 500 Hits Record All-Time High, Ends Shortest Bear Market
President Donald Trump noted the new record high on his watch and said this was a sign of things to come. He earlier tweeted: “Jobs are flowing, NASDAQ is already at a record high, the rest to follow.”
The stock market’s remarkable performance is all the more impressive given the present situation. Unemployment, while declining, is still higher than 10%, as the economy remains in limbo. The coronavirus pandemic has limited businesses from operating in full. On the political front, the inter-party squabbling has paralyzed any stimulus relief efforts.
Instead of looking at the worst-case scenario, investors anticipated a better future. The market cheered to any news heralding a breakthrough in vaccine development. Stock prices went up at any mention of higher job numbers or a rise in retail sales. This optimism can run out quickly at the earliest sign of bad news. This can come in the form of delayed vaccine approval or if stimulus money runs out.
The S&P 500 also ended the shortest bear market in history beginning March 23. Since then, the index posted its largest gain in a 103-day period in 87 years, according to Refinitiv data.
The Index Shows the Biggest Players
With indices listing thousands of public companies, the biggest ones often dominate. Weighted by the market cap, the state of these big players often determines the index’s health. As the top five S&P companies kept exceeding estimates, the entire Index seemed to follow. And why not? You’re in good company with Apple, Google (Alphabet), Amazon, Facebook, and Microsoft. Combined, they account for one-fourth of the total S&P market capitalization.
Crestwood Advisors CEO Michael Eckton believes the market rally is far from broad-based. The big companies have “an amplified effect” that overshadows the broader economy. He noted that despite the surge, “many other stocks are still struggling.” The big players also have deeper pockets. They have cash on hand, access to loans at low-interest rates, and options to survive a recession. This includes spinning off business units or retrenching employees.
Smaller businesses, meanwhile, face greater danger. With federal aid drying up, mom-and-pop operations are more likely to feel the pinch and close shop. Jeff Mills of Bryn Mawr Trust said that once you remove the five tech giants from the S&P, the picture will be different. He said it would be one “that looks a lot more like the “real” economy.”
Mills noted that “Most stocks are not making new recovery highs. If you remove the five largest stocks in the index, the S&P 500 would actually be down 4 percent rather than up 3 percent.” “The narrowness of where investors are looking to put their money,” he noted, “…is a big part of the story.”
Fed Intervention Also Helped
Federal intervention during the earlier days of the coronavirus pandemic also helped. While the intentions were to save the economy, they caused investors to turn to the stock market. By reducing interest rates to near zero, investors avoided safer assets like T-bonds. At the same time, the Fed also assured the public that the government will protect the stock market. So, everybody went there with their money instead, including stimulus check recipients.
What does the record high of the S&P mean? Given that only half of Americans own stock, a stock index record wouldn’t mean much. Investors who bought low and sold high will get their windfall. Those who are oblivious to Wall Street will continue to see a stalled economy hit by a pandemic.
Wayne Wicker of Vantagepoint Investment Advisers summarized it best. He remarked that “At the end of the day, a record is just a number.” But the rise in the stock market suggests that investors see a recovery on the horizon. He said, “Markets care about better or worse, not good or bad.” If the market thinks we’re about to become better, then it might be a good thing.
Watch this as CNBC Reports on the S&P 500 Hitting Its Record High After Retail Sales and Tech Stocks Surge:
Do you share the market’s sentiment that the best times are about to come? Will you agree enough to bet on the market? Let us know what you think about the S&P record set during these times by leaving your comments in the comment section below!