The halftime of the year 2020 is almost here, and the bulls are weary after a furious comeback to reduce what was a deep deficit after the first quarter.
Fatigue was to be expected after the best 11-week sprint in the history of the market, a 44% gain in the S&P 500 from March 23 to June 8. And under normal circumstances, stocks return a sixth of an accelerated rally, as the Index has been in the last three weeks, it would be seen as routine. And, chances are it’s a routine if an uncomfortable kick.
But very little about this year has been typical, even if some of the rhythms are familiar. In a normal year, the S&P 500 with a 6% drop halfway would make investors ask, “What went wrong?” instead of “Why isn’t it much lower?” And, in fact, it is not too common for the market to keep those losses around the middle of the year.
Here’s the 2020 S&P 500 course against the path of the only three years out of the last 16 in a similar spot at this point: a year when a bear market turned catastrophic (2008); next year (2009) when a powerful new bull market began after a March weather bottom; and a third (2010) when concerns about a weak recovery and debt indigestion caused the first verification of what would become a decade-long uptrend.
Of course, the trajectory of the Covid pandemic and the adaptations of consumers and businesses will be the main driver of how markets operate from here.
Key questions for the second half
But in more market-specific terms, the way things are going in the coming months comes down to a few key questions:
- Can this market continue to act as an early (or completely renewed) bullish phase, with broad strength, cyclical equity leadership, and the ability to look through the short-term economic struggle?
- How much more can you expect from costly soaring growth stocks to boost indices as investors wait for the recovery to gain strength?
- Is there still enough cash and caution on the market to cushion the downside and serve as fuel for recovery in the coming months?
The powerful rally from March to June marked several of the boxes for those trying to certify significant and lasting casualties and recoveries in the market. The persistence of price gains, the amount of losses recovered in a short time, and the rare breadth of stocks showing extreme momentum prompted technical strategists to call it an early bull market. Forward returns after the type of upward lunge we saw in June are historically strong for the next six to 12 months, but in the near term often lead to slowdown and turmoil.
In the past three weeks, average market shares have dropped 12% and core service sector revival activities at airlines, hotels, casinos and retailers have fallen 20% or more from highs in early June due to investors have been forced to rethink the assumptions for a strong and linear restart of the economy once the “free pass” of the street was nearing maturity.
During most of June, the cyclically oriented sectors have regressed, while defensive growth stocks maintained the situation. And one problem with the idea of a new bull market is that no valuation excesses were drawn from the stocks. Truth be told, it was more of an accident fueled by an event mitigated by an overwhelming and swift political bailout. Stocks never for a moment became cheap, nor were balances cleaned in any way.
Right now, the median S&P 500 stock is trading at 20 times future earnings: expensive in short, forgivable if earnings collapse is brief, largely justifiable only compared to compressed corporate debt costs .
Which brings us to the question of what more could you ask of the mega-cap growth leaders, the top five now almost a quarter of the S&P 500. This group was not spared from last week’s modest sell-off, the Increase in Serial Stock Price Target Increases Analysts at Apple and Amazon fail to generate new impetus for investors to aggressively pledge new money to them. For now at least.
While it has been celebrated that these winning digital platforms consolidate their dominance in the on-demand economy and stay at home, the market is treating them primarily as sources of scarce and lasting cash flows similar to bonds with rising price potential.
Here is the Nasdaq-100’s free cash flow performance against Treasury bond yields, high-grade corporate debt and S&P 500 dividend yields over the past five years. All compressed along a similar curve.
Does this mean that this group of stocks would have a hard time maintaining their value in a higher bond yield environment? Does it even seem like a scenario worth anticipating right now?
As for the cash supply and precaution, by most measures it is broad enough to prevent capital setbacks from becoming too deep or messy for now. Hedge fund positioning measures and traditional institutional exposures suggest that professionals are not overly committed to leveraged or momentum stocks.
Citi’s equity strategist Tobias Levkovich released the results of a new survey of institutional fund managers on Friday that reveals great caution. They held cash levels twice the long-term average, with most calculating corporate earnings forecasts for 2021 too high, with only a third thinking the S&P will return to early June levels above 3,200 by the end of the year. year and, when asked if a 20% market was more likely a 20% decline or recovery, 70% of managers chose a 20% decrease.
This kind of precaution is a market advantage, if not an automatic catalyst for the S&P to return to the June highs, which after all sit on an island in the charts with a 7.5% rebound from here. as the days go by. until half time.