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It’s like the bear market never happened. And maybe just did that.
The stock market had another good week, with the S&P 500 index ending 0.6% to 3372.85; the Dow Jones industrial average rose 497.54 points, or 1.8%, to 27,931.02; and the Nasdaq Composite which gained 0.1%. The S&P 500’s profit was good enough for the index to complete the week within 0.4 percentage point of its February 19 record high.
In other words, if you went to bed on February 19th and woke up on August 14th, you would think nothing had happened.
Assuming the S&P 500 trades at a new high, it would be the fastest recovery of a bear market on record. And it would not even matter if the S&P 500 took its time – the previous record was 310 trading days of the low market on February 9, 1966, until May 4, 1967.
But what if the market has no bear market? By the traditional definition, it was obvious: The S&P 500 dropped 34% from February 19 to March 23, much more than the 20% needed to meet the requirement. But there are other ways to think about whether a drip is really a bear mark. For example, a typical peak-to-peak recovery takes 1,542 trading days, on average, according to Dow Jones Market Data, so the speed of the rebound alone would suggest that something else is happening.
A bear mark should also mark a clean break with what came before it. That was the case during the 2007-09 financial crisis, as banks went from the sector with the best performance to laggard, and in the dot-com chest, when tech stocks suffered massive losses but value investors made like bandits.
Instead, Michael Shaoul, CEO of Marketfield Asset Management, compares the drip to two other major declines, one officially a bear market, the other not.
The first happened in 1987, when the S&P 500 fell 34% of its full time – including the Black Monday tumble, 20%, still the biggest one-day decline on record. The second happened in 1998, when the emerging market crisis and the boom of hedge fund Long-Term Capital Management made the S&P 500 19.3%. In each case, they have seized it, despite obstacles we can scarcely imagine. ” And in Shaoul’s opinion, another bubble is being blown.
“Under current circumstances, the chances of central banks ‘third time happy’ seem to be at a distance, and we increasingly believe we are heading for some form of ‘bubble problem’ along the way,” Shaoul writes.
You do not have to take his word for it. Think of Bank of America analyst John Murphy’s Friday morning upgrade of Tesla (ticker: TSLA) – which gained 295% to $ 1,650.71 in 2020 – from Sell to Hold. It was not that Murphy suddenly had a change of heart at Elon Musk’s company. Instead, he called Tesla’s unrestricted access to cheap capital gained by the endless rise of the stock.
“It is important to recognize that the higher the upward spiral of [Tesla’s] share, the cheaper capital is used for growth funds, which is then rewarded by investors with a higher share price, ”Murphy writes.
Think about that for a minute. Murphy describes a positive feedback loop, one that is almost guaranteed to lead to a price far above what fundamentals suggest it should. And that same dynamic is playing out in different parts of the market, says Jason Brady, CEO of asset manager Thornburg. The market is led by companies that have become stronger because of the coronavirus, able to offer growth at a time when the Federal Reserve has pushed interest rates well below the level of inflation. It’s a good story, he says, but can start to push too far.
“That’s where things get a little silly,” Brady says.
So if the market is in a bubble, what could pop up? BTIG strategist Julian Emanuel offers a few potential catalysts. A fax could cause investors to buy economically sensitive stocks above those who benefit from everyone working at home. Interest rates could go up, causing financial stocks to increase – and inflated multiples to contract. Continued tensions with China could also cause problems for high-flying tech stocks.
“Or will there be no catalyst because identifying bubbles in the backdoor, as it was in Y2K,” Emanuel writes.
And maybe then we will have a real, genuine, honest-to-bear bearer.
Write to Ben Levisohn at [email protected]
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