A look at the state of the stock market one year since the peak before Covid

Traders work on the floor on the New York Stock Exchange (NYSE) in New York, USA, February 27, 2020.

Brendan McDermid | Reuters

Despite all the unprecedented events and unforeseen consequences of the past year, market conditions today rhyme much more closely with those of mid-February 2020, when equities peaked before the Covid crash.

In the six months leading up to the arms index on 19 February 2020, the S&P 500 achieved 15.8% to a series of new highs of all time. Today, the index has risen 15.9% over the past six months, with the bulk of the inventory clicking on new records.

Many of the talks around the market are also similar: concern that too much of the market is dominated by some large growth stocks (the top five S&P stocks were then 20% of the index and are 22% today) and investor sentiment may have become too complacent.

Then, as now, the S&P was at a 20-year high in terms of valuation, the forward price / earnings ratio was then just above 19 and now more than 22 – but for those who prefer the returns of shares compared to Treasury yields, the gap is fairly close: 3.7 percentage points versus 3.3 now.

The spread on high-yield bonds has made an almost perfect return over the past year, sitting at the lowest level, which fits in the sense that generous credit markets lubricate the economy and markets.

Here’s how this equity asset support of forgiving debt capital markets was featured in this section one year ago this weekend:

“Real investment grade returns in corporate bonds are barely above zero. The Chicago Fed National Financial Condition Index shows that the liquidity background is as loose as in this cycle … A clear majority of the S&P 500 shares have a dividend yield of more than the ten years. Treasury return. While not a perfect relative value indicator, it tends to provide a buffer under the valuation of the shares. “

This is also true today. And so too the feverish purchase in a cup of expensive “story shares” that excites younger and more aggressive investors, while making the traditionalists a little nervous.

A year ago: ‘a group of stocks that could be called’ idiosyncratic speculative growth ‘is also working quite well this year, a sign that investors are aggressively grabbing at the next big thing (or maybe just the next quick buck). ‘Then it was Tesla, Beyond Meat and Virgin Galactic. Today, it’s a few dozen names from GameStop to Canadian cannabis to fuel cells to early stages of fintech programs.

What is different now

The echoes are therefore quite clear as this anniversary approaches. However, the differences are very important and make the current market more dynamic in favorable and potentially dangerous ways.

Let it be clear that the fact that a similar market is not being taken into account now predicts something like a repeat of the collapse of the market and the economic disaster that began to unfold at the end of February last year. The spread of the coronavirus was a genuine external shock; the forced global economic downturn was a first, the five-week-35% freefall unprecedented.

This brings us to the key differences between now and a year ago. The collapse restored the clock in the economic cycle and policy positions. From 2019 to 2020, Wall Street was caught in a late-cycle vigil, with the economy close to the highest employment rate, the treasury yield curve flat, corporate profit margins near the peak, and revenue expected to be flat.

The Fed was indefinite in February 2020 with a short rate of 1.5-1.75%, but a significant minority of Fed officials predicted a rate hike in 2021.

The rapid recession and the collapse in profits probably caused more than $ 5 trillion in underfunded fiscal support, and this has made the Fed easy for a long time to come, with the goal of waiting for a return to full-time work and a lasting rise in inflation before making any shifts.

So, yes, the valuations are higher now and investor expectations can become unrealistic.

But Corporate America has been refinancing itself for years at invitingly low rates against a Fed setback, earnings will be above their previous peak again this year, the government is eager to warm the economy and (probably) policymakers have only a short process of repeatable process performed. -circle a recession.

Smaller investors rush in

Another way things have changed within a year is the big rush of smaller investors in the market, who feel invincible after getting through the crash and getting an almost 80% rebound in the S&P 500.

Investors’ willingness to take advantage of upside bets in the form of call options in unprecedented volumes and the immediate emergence of new IPOs, such as DoorDash, Snowflake and AirBNB, to more than ten billion in market value at large amounts of revenue a new more aggressive and risky tolerant ethos to the band.

Some of this energy started flowing a year ago, but it has not gained nearly as much momentum or so much viral character. The Russell Micro-Cap Index rose 65% in 3 months. The volume of penny stocks doubled over the same period. Total trading volumes are rising, even though the indices have risen – the reverse of the typical pattern and back to a similar pattern from the late 1990s. Over the past week, the inflow of shares has set a new record.

Social media sampling has reduced GameStop shares from $ 12 to $ 400 to $ 52 over the past two months, and Tilray has fallen from $ 18 to $ 63 to $ 29 within two weeks. Meanwhile, volumes in fixed S&P 500 ETFs have fallen in the direction of lows for more than a year, apparently not enough for the marginal buyer.

The whole litany that describes the untamed animal spirits running through Wall Street says that it is a powerful and well-sponsored bull market, and that the risks of a wild surplus continue to build. Then everyone is aware again that they are building and they have been sounding the alarm for a while.

Bank of America indicator near sales area

Is the fact that the sub-sectors of Reddit stocks and dull green energy plays overwhelming and then being pierced without undermining the big-cap indices, then it says that it is not dangerous? Or is the fact that a few days’ purchases in small short-term stocks at the end of last month caused a rapid 4% S&P 500, a warning that the volatile tremors may not always disappear safely through the foundation of the market?

A year ago, Bank of America’s global strategist Michael Hartnett urged investors to continue to play risk assets “until investors become ‘euphoric’, which he expects to indicate the moment of ‘peak positioning and peak liquidity’. . ” Hartnett believes the same vigilance now, its Bull & Bear indicator keeps investors properly engaged, but rises to a conflicting sales threshold (which preceded corrections in the past and was last hit in early 2018).

It all goes back to the thought that was broadcast here in early January that 2021 is a new blend of 2010 and 1999 – the first full year of a new bull market driving long-term recovery forces, mixed with the final year of a powerful bull market that blew through every upside target and created levels of excess that took several years to finish.

Interestingly, however, the core of the market captured by the S&P 500 is metabolizing this mix with a fairly steady and well-turned – one might even say boring – uptrend. At least for now.

Starting next week, Mike Santoli’s columns will only be available on CNBC Pro.

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