By Tim Courtney, Chief Investment Officer
Last week marked one year since the market hit an all-time high on February 19, 2020.1 Following that peak, the market fell precipitously in light of the COVID-19 pandemic, dropping more than any other 27-day period in history.2 That was followed by a strong recovery, and the market is now up close to 75% from the bottom on March 23.2
Much of this rally was to be expected as we see signs that the economy is recovering. Earnings may reach record highs in 2021, and gross domestic product (GDP) is projected to grow 4-5% this year.3 What is unexpected, however, is that we have not had a correction of 10% during this current bull market.2 We have seen meaningful down days and weeks during this recovery, but we would normally expect to see one, if not more, corrections during a market surge of this magnitude, especially with the uncertainty 2020 produced.4
So while there are fundamental reasons for markets to have strongly rebounded, there are likely other factors supporting the market and keeping pullbacks to a minimum. Probably the biggest contributing factor has been the combination of interest rates effectively dropping to zero5 and the federal government sending out multiple rounds of fiscal stimulus.6
With bonds yielding near zero and citizens holding cash that they weren’t spending during lockdowns, people attempted to position their assets in a more productive manner. As a result, many disparate asset classes began surging and some even hitting all-time high valuations7, including equities, residential properties, bitcoin and commodities.
But investors should always acknowledge the risks that make these returns possible. One such risk is interest rates, as in what goes down can go back up. Stocks and real estate prices have been helped by very low rates. That won’t always be the case. In fact, the 10-Year Treasury rose from 1.15% to 1.50% in the last two weeks.8 These rates are still very low relative to historical averages8, but increasing rates could change what has been a tailwind for returns into a modest headwind for some assets. It is possible that an unexpected quick move higher in rates may be the catalyst for that normal correction the market has so far avoided.
A quote from Benjamin Graham explains why markets move the way they do9: “In the short term, the market is a voting machine” (crowds can move prices up or down like we’ve seen in the recent trading of names like GameStop10), “but in the longer term, it is a weighing machine” (stock prices will move closer to their fair value).
We’re continuing to assess asset and stock valuations and what impact interest rates and other factors will likely have on those valuations. We believe that investors should remain in positions to capture market returns provided by that weighing machine by investing in productive companies across the world. If you have any questions about this, please contact your Exencial advisor.
1. MarketWatch (2/19/21) – The S&P 500 was at its peak one year ago today. This chart shows the remarkable recovery from the drawdown that ensued
2. Yahoo! Finance (data as of 2/26/21) – S&P 500
3. The Wall Street Journal (1/14/21) – WSJ survey: U.S. economic growth will exceed 4% in 2021
4. CNBC Grow (6/21/19) – How often do stock market corrections happen?
5. CNN Business (3/16/20) – Federal Reserve cuts rates to zero to support the economy during the coronavirus pandemic
6. Investopedia (2/17/21) – COVID-19 government stimulus and financial relief guide
7. Financial Times (2/8/21) – Global indices hit record highs as rally resumes
8. MarketWatch (2/26/21) – U.S. 10 Year Treasury Note
9. Morningstar (2015) – The voting and weighing machines
10. Bloomberg (2/26/21) – GameStop heads toward best week in a month amid Reddit frenzy
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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