The Covid pandemic turned this year into a year of unprecedented events — not the least of which was the swift crash and then record-fast recovery of the stock market. The market’s race higher has been in stark contrast to an economy that has been growing slowly.
Many small businesses are struggling, and there are still more than 10.7 million people unemployed, according to Labor Department monthly data. Even so, the market has powered higher, fueled by expectations of a period of strong growth after vaccines are widely distributed and the economy fully reopens.
Those same expectations have helped draw in a different cohort of investors, many of them young and new to investing. JMP estimates the brokerage industry added more than 10 million new accounts in 2020, with Robinhood alone likely representing about 6 million.
“One of the things that the pandemic has underscored more than anything else is that the stock market is a forward-looking mechanism,” said Michael Arone, chief investment strategist at State Street Global Advisors.
“That’s been the tagline all year long as investors continue to scratch their heads wondering why the stock market could perform so strongly while the economy, labor market and earnings face such challenges. It’s more about future expectations than current conditions. It’s something that investors were loosely aware of in the back of our minds always.”
The market plunge and its rebound paralleled America’s response to the virus. There was shock and fear, followed by hope for a recovery but with some setbacks along the way, as the virus continues to spread while investors look forward to the vaccine.
The year 2020 started off the way it was expected to, and then things went bad fast in late February and March as the pandemic spread and government officials around the world and in the U.S. shutdown economic activity.
“Usually it takes an unanticipated event to cause the market to get knocked on its ear, and nobody prior to the new year, that I can think of, said we’re going to have a problem with a virus in 2020, ” said Sam Stovall, chief investment strategist at CFRA. “Everyone creates their yearly forecast in early December, so if the market was still at an all-time high Feb. 19, obviously a majority of people continued to think it would be a good year and even with the virus in the background it would not be a world altering event — and oh, how we were wrong.” The virus has thrown many trends that were already underway into hyperspeed.
“Everything was so fast. We went from peak to trough in 33 calendar days, which was three times as fast as the 1987 bear market. Feb. 19 was the record. It fell 34% in 33 calendar days,” Stovall said. “The Fed said we’re going to do whatever it takes, the market said you don’t fight the Fed and we got to breakeven on Aug. 18, which made it the fastest recovery on record and then we scored 19 new highs since then.”
The S&P 500 is up more than 65% since the March low, and nearly 16% for the year. The Nasdaq is 44% higher for the year. Stovall and other strategists say it would not be surprising to see a pull back in the early part of the new year.
“Valuations right now are trading at a 42% premium,” said Stovall. He was referring to the premium above the average 12-month forward price-to-earnings ratio of 16.7 for S&P 500 stocks going back to the year 2000. It normally is about 16.
“There’s always a weird dichotomy between stocks and the economy except in the initial stages of a recession, when the economy falls sharply. The initial news that the economy is crumbling seems to crush the stock market, but the recovery is much longer for the economy than it is for stocks,” said Chris Rupkey, chief financial economist at MUFG Union Bank.
“The only difference in this stock market is the stock indexes have gotten to levels that are at values we almost haven’t seen before … We haven’t seen valuations since before the internet sock market bubble in the late 1990s,” he added. “It’s OK for stocks to be here if companies are going to make a lot of money next year.”
Rupkey said investors point to the last recovery in 2009 and note stocks moved higher ahead of the economic recovery. But he noted that at the time, valuations were rising into the teens, not above 30. The way investors look at the market has also changed, and that may be a direct result of the way the pandemic has impacted the economy.