Bad news doesn’t seem to bother Wall Street these days.
Coronavirus-related deaths and hospitalizations are skyrocketing, and many companies have put plans to return to the office on hold. Staffing and supply chain bottlenecks persist while consumer confidence has fallen.
Yet the stock market continued its quite remarkable year in August, posting the seventh straight monthly rise. The S&P 500 index is up over 20 percent for 2021 and has more than doubled since its low in March 2020. The market closed at a record high 53 times – the most at this point in the year since 1964, according to LPL Finance.
It’s a climb that is inconsistent with the reality of the virus in many parts of the country, but most investors are convinced of two things: the Federal Reserve may keep interest rates low for years to come, and the federal government won’t before that shy away from spending big bucks to keep the recovery going.
“I hate to say it,” said Ed Yardeni, a longtime market analyst and president of the stock market research firm Yardeni Research. “But it looks like we’re learning to live with this virus, and the market certainly has.”
Not everyone expects the rally to continue unabated. And any disruption of investor expectations for interest rates and government support – or a sharp slowdown from Delta or some other variation – could change the persistently sunny outlook.
But so far, the ongoing pandemic has boosted the stock prices of companies whose profits are directly tied to it – Moderna’s 260 percent rally this year made it the best performer of the S&P 500 – and those that, like metals, are profiting from the chaotic economic rally can manufacturers, energy companies and semiconductor manufacturers.
The breadth of the boom became clear in July. Strong earnings results were generally expected for the second quarter, but expectations were exceeded: Nearly 90 percent of companies exceeded analyst forecasts, the highest number of such “blows” ever recorded, according to Refinitiv data from 1994.
“The numbers were spectacular,” said David Kelly, chief global strategist at JP Morgan Asset Management. “They had an exceptionally strong recovery from the recession.”
Typically times of strong economic growth and glowing profits are also accompanied by high or rising interest rates, which tend to counter the stocks. But not this time.
Despite higher-than-expected inflation, the Federal Reserve has signaled that it wants to keep rates low, even as it prepares to slow – or “cut” – the money printing and bond purchases it began at the start of the pandemic.
Jerome H. Powell, chairman of the Federal Reserve, stressed in a closely watched speech last week that rate hikes are a long way off and that the Fed is prepared for the risk of the delta variant of the coronavirus. His comments helped catalyze a new scramble to the top for the market.
“I think investors can live with tapering because everyone knows it’s going to happen and it has been talked about so much,” said Ryan Detrick, chief market strategist at LPL Financial, a brokerage and investment advisory firm. “But knowing that interest rates will stay a little lower for longer is the icing on the cake of an economy that is still improving overall.”
Such widespread optimism is far from how investors reacted when the pandemic first broke out. Shares plunged 34 percent as the extent of economic risk finally dawned on them in early 2020.
Interventions by governments and central banks dampened the panic. The Federal Reserve cut rates to near zero and began pumping money into the financial markets. The Trump administration and Congress quickly cut trillions of dollars in corporate and household aid spending to cushion the economy from the worst of damage and kickstart the market surge.
Aug. 31, 2021, 7:36 p.m. ET
The initial rally focused on stocks that should thrive in a work from home world, including online retailers like Etsy, exercise bike company Peloton, and suddenly ubiquitous services like Zoom Video.
But stocks rose in November as favorable vaccines results raised expectations of an economic recovery. Companies like airlines, casino companies, and commodity manufacturers also started running higher.
As much as the stock market loathes uncertainty, the changing delta threat has not matched investor confidence that Washington will provide plenty of support – no matter what.
When the S&P 500 soared to double its Covid-era low this month on March 23, 2020, it was the fastest 100 percent increase in the index since World War II, according to Yardeni Research. In about 17 months, the rally created nearly $ 20 trillion in stock assets.
Besides the sheer angle of the climb, analysts are impressed with the smoothness of the rally. According to Detrick, the S&P has not suffered a 5 percent decline since October. Even with a 0.1 percent decline on Tuesday, the market is only a day away from its recent record high.
It won’t take forever, of course. The seemingly effortless upward slide of the market will inevitably lead to turbulence – and some experts believe it likely sometime in the next year.
Mike Wilson, chief US equities strategist at Morgan Stanley, said he believed there would be some sort of “addition” if the economic picture changes.
The economy, which will grow at a pace of over 6 percent this year, is widely expected to slow down. Goldman Sachs recently cut its growth forecast for 2021 from 6.4 percent to 6 percent, citing the impact of the Delta variant. Slower growth could mean less impressive corporate profits.
And even if the Federal Reserve doesn’t actually raise rates, its support for the stock market will wane as it cuts back the money printing and bond buying programs that investors have become accustomed to.
“We expect exceptional fundamentals to deteriorate and growth to slow significantly,” said Wilson. “And we’ll see the Fed begin removing the accommodations.”
Both of these factors contribute to lower stock prices. Wilson said he believes the market is due for a correction – Wall Street’s term for a decline of 10 percent or more.
But, he said, the longer the market rises and the further stock prices are out of whack with standard measures of value, the sell-off could be worse.
“This correction can be more than 10 percent,” said Wilson. “It can be 10 to 20.”