The S&P 500 hit a fresh all-time closing high earlier this week, eclipsing its prior high set on February 19th, and is now up nearly 6% on the year. Shortly after its February milestone, the market went into freefall, as the rapid spread and severity of the coronavirus pandemic became apparent. Over the next month, stocks dropped by a full third, reaching their bottom on March 23rd. The depth of the crisis set Congress and the Administration into uncharacteristically swift and cooperative action, releasing a torrent of money to households via stimulus payments and unemployment support. The Fed returned to a familiar crisis role, slashing interest rates and backstopping credit markets. Combined, these policy actions helped to sustain an economy badly damaged by the COVID-19 pandemic.
The pandemic continues to affect all facets of our lives, and will yet for some time. Case counts and fatalities have steadily marched higher, and were given an unfortunate boost by what we now know to be a too-hasty reopening in much of the country in late Spring. There is some encouraging news, however. The hottest hot spots in the South and West have come off the boil, and fatality rates are down as we’ve learned more about treating the sick and protecting the vulnerable. The goal of developing effective vaccines draws closer with the passing of time. At present, four vaccines have entered late-stage Phase 3 testing, with several more nearing that important threshold.
Clumsily, haltingly, we are learning to live with the pandemic. The initial case surge that enveloped New York and New Jersey has passed. The worst of equipment shortages has abated, although testing remains (still!) a problem area for timely, accurate diagnosing. Unfortunately, throughout the country, there are countless people insisting on doing things the hard way, refusing to wear masks even where they are required, for example, or flouting the conventions on group gatherings and social distancing. All of these behaviors only serve to prolong the pandemic.
But what are to make of the stock market? Statistically, this is the shortest-ever bear market recovery from the old high to the fresh one, with a severe drop in between: just under five months. Are we back on an economic roll? We believe the answer is a nuanced one, and there remain plenty of unknowns, but we find market prices as fair ones.
One wonders if the resiliency of the stock market may owe itself, in part, to our collective bungles on pandemic response; they’ve shown us how bad things could get. We have backed away from the worst of outcomes, though. Although we are laboring on with the drag of the pandemic’s effects, with life not close to being the “old normal” and with a multitude of industries such as travel, restaurants, and smaller retail still suffering mightily, we have come to understand the contours of this pandemic. COVID-19 will continue to alter the economic landscape and society’s fabric, but perhaps in ways we think we can understand.
Although the S&P 500 has returned to its highs, other measures of stocks have lagged. The average stock in the S&P 500 still remains negative on the year, off 3.6%, despite the overall index being ahead 5.8%. This disparity is due to the largest companies in the index performing much more strongly than the average stock. Apple, for instance, became the first company in history to reach a $2 trillion market value. The big are getting bigger, and more valuable; at the same time, the biggest companies are those that are better-insulated than most to the economic effects of COVID. Apple, Microsoft, Amazon, Google, and Facebook—to pick the most valuable companies in the market—are all, to varying degrees, significant beneficiaries of the disruptions caused by COVID. Meanwhile, smaller stocks in the market have struggled, in a relative sense. On balance, all of these developments make sense to us.
Stock prices have also been helped from the paltry interest rates currently in the market. It’s a global phenomenon, as rates are low everywhere, courtesy of coordinated central bank actions. Higher rates normally would offer a degree of competition for investors’ capital. Right now, they are not mounting a fight. Rather, low rates and high liquidity (money supply) conditions have had the effect of leaking into financial markets and helping to bid up stock prices. With inflation relatively quiet at present, there is a legitimate case to value the earning assets and profits of companies more fully via higher stock prices. And we do foresee continued “easy money” conditions coming from the Fed. They’ve explicitly told us as much.
We have continued to position our clients’ portfolios in line with our thinking. In our Global Growth strategy, we have prudently trimmed some strong performers that had grown to outsized positions, and added capital back to several smaller holdings in social media and technology. In our Opportunity strategy, we initiated positions in the nation’s dominant food distribution company, and also in the leading provider of sleep apnea appliances. In our Ascent Managed Portfolios (AMP) strategies for smaller accounts, we have repositioned capital toward larger and “growthier” parts of the market, while exiting other sectors such as Real Estate entirely. We have maintained our investments in Ascent Dividend Focus since several repositioning actions we took around the March lows.
In sum, we can make a case for the market’s levels. We had a good economy before the onset of COVID. It was an increasingly mature expansion, yet one without the excesses that typically serve as recession precursors. We have bounced back from the darkest and most fearful days of the pandemic as, right or wrong, we are believing we’ve sized up the opponent. In the meantime, supported by low interest rates, market prices have attained their earlier levels, or close to them, although with some relative winners and losers throughout that process, as the nascent recovery unfolds.