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Here’s a weird twist to American exceptionalism: American stocks, as measured by the S&P 500 benchmark, hold up against their European rivals, despite US coronavirus cases rising again and threatening economic recovery, while European countries seem to have the outbreak largely under control.
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Oliver Jones, senior markets economist at Capital Economics, argued in a note Tuesday that there was more to the phenomenon than the valid but often cited overweight weighting of tech and healthcare companies in the S&P 500 SPX,
In particular, he emphasized that the index “also contains almost all of the world’s largest listed companies, including several global monopolists with vast cash reserves. “
“After taking sector patterns into account, large companies with strong balance sheets have been much better able to weather the storm from the coronavirus crisis than most. Some have even used it as an opportunity to secure their dominance, taking advantage of the assets of potential weakened rivals, “he said, noting that the five largest companies have announced” 18 notable acquisitions between them since the crisis began. “
Jones noted that, in contrast to the S&P 500, the US small cap indices, which also do not share the sectoral advantages of the S&P 500 and are more exposed to the national economy, have fallen sharply since June 8, much worse than their European counterparts. (see box below).
CAPITAL ECONOMY
According to a New York Times tracker, the number of new cases in the US continues to rise, while in most Western European countries it has remained stable or decreased in the past two weeks.
Meanwhile, the S&P 500 has performed “no worse” than the leading European indices despite real-time data pointing to stagnation in the US recovery.
Jones argued that “what stands out the most is that the relative performance of large-cap capitalization indices has had at least as much to do with global sector patterns as with domestic economic performance.”
But, he cautioned, that carries a huge “counterintuitive implication” for relative performance once the United States controls its virus outbreak: “the S&P 500 may not be the biggest beneficiary.”
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