{"id":107011,"date":"2021-02-13T15:27:49","date_gmt":"2021-02-13T15:27:49","guid":{"rendered":"https:\/\/fin2me.com\/?p=107011"},"modified":"2021-02-13T15:27:49","modified_gmt":"2021-02-13T15:27:49","slug":"a-look-at-the-state-of-the-stock-market-one-year-since-its-pre-covid-peak","status":"publish","type":"post","link":"https:\/\/fin2me.com\/markets\/a-look-at-the-state-of-the-stock-market-one-year-since-its-pre-covid-peak\/","title":{"rendered":"A look at the state of the stock market one year since its pre-Covid peak"},"content":{"rendered":"<ul>\n<li>There are several similarities between the market at its pre-Covid peak on Feb. 19, 2020 and today, including worries about growth stock domination, valuations and speculative story stocks.<\/li>\n<li>But there are some key differences like $5 trillion and counting in deficit-financed fiscal support, a Federal Reserve turned maximum easy for a long time to come and a rush of smaller investors into the market.<\/li>\n<li>The untamed animal spirits coursing through Wall Street says both that this is a powerful and well-sponsored bull market and that risks of a wild overshoot are building.<\/li>\n<\/ul>\n<p>For all the unprecedented events and unforeseen consequences of the past year, market conditions today rhyme rather closely with those of mid-February 2020, when stocks peaked right before the Covid crash.<\/p>\n<p>In the six months leading to the Feb. 19, 2020, crest in the indexes, the S&amp;P 500 had gained 15.8% to a series of new all-time highs. Today, the index is up 15.9% the past six months, and has been clicking to new records for most of that span.<\/p>\n<p><svg width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"#002F6C\" aria-labelledby=\"title desc\" role=\"img\" focusable=\"false\" data-analytic-id=\"expand-icon\" class=\"InlineImage-background\"><title>Zoom In Icon<\/title><desc>Arrows pointing outwards<\/desc><circle cx=\"10\" cy=\"10\" r=\"10\" fill=\"white\" stroke=\"#002F6C\"><\/circle><\/path><\/svg><\/p>\n<p>Much of the talk around the market is similar, too: Worries that too much of the market is dominated by a few huge growth stocks (the top five S&amp;P stocks were 20% of the index then and are 22% today) and that investor sentiment had perhaps grown too complacent.<\/p>\n<p>Then, as now, the S&amp;P was at a 20-year high in terms of valuation, the forward price\/earnings ratio then just above 19 and now surpassing 22 \u2013 yet for those who choose to compare equity earnings yields to Treasury yields, the gap is pretty close: 3.7 percentage points then versus 3.3 now.<\/p>\n<p>The spread on high-yield bonds has made an almost-perfect round trip in the past year, sitting right at extreme lows, which fits into a sense that generous credit markets are lubricating the economy and markets.<\/p>\n<p><svg width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"#002F6C\" aria-labelledby=\"title desc\" role=\"img\" focusable=\"false\" data-analytic-id=\"expand-icon\" class=\"InlineImage-background\"><title>Zoom In Icon<\/title><desc>Arrows pointing outwards<\/desc><circle cx=\"10\" cy=\"10\" r=\"10\" fill=\"white\" stroke=\"#002F6C\"><\/circle><\/path><\/svg><\/p>\n<p>Here&#x27;s how this equity-asset support from forgiving debt capital markets was characterized in this column one year ago this weekend:<\/p>\n<p>&quot;Real investment-grade corporate bond yields are scarcely above zero. The Chicago Fed National Financial Conditions Index shows the liquidity backdrop is as loose as it&#x27;s been this cycle&#8230;A clear majority of S&amp;P 500 stocks have dividend yields exceeding the 10-year Treasury yield. While no perfect relative-value indicator, this tends to provide a buffer underneath equity valuation.&quot;<\/p>\n<p>All of that is true today as well. And so is the fevered buying in a clutch of expensive &quot;story stocks&quot; which excites younger and more-aggressive investors while making the traditionalists a bit nervous.<\/p>\n<p>A year ago: &quot;A cluster of what might be called &#x27;idiosyncratic speculative-growth&#x27; stocks are also acting quite frisky this year, a sign that investors are grasping aggressively for the next big thing (or perhaps just the next quick buck).\u00a0&quot; Then it was Tesla, Beyond Meat and Virgin Galactic. Today it is several-dozen names from GameStop to Canadian cannabis to fuel cells to early-stage fintech apps.<\/p>\n<h2>What&#x27;s different now<\/h2>\n<p>So, the echoes are pretty clear as this anniversary approaches. The differences, though, are several, important and make the current market more dynamic in ways both favorable and \u2013 potentially, eventually &#8211; hazardous.<\/p>\n<p>Let&#x27;s be clear that noting the similar market set-up now is not remotely to predict anything like a repeat of the market collapse and economic calamity that began to unfold in late February of last year. The coronavirus spread was a genuine external shock, the forced global economic halt a first, the five-week-35% freefall unprecedented.<\/p>\n<p>Which brings us to some of the more crucial differences between now and a year ago. The collapse reset the clock on the economic cycle and policy stances. From 2019 into 2020 Wall Street was caught in a late-cycle vigil, with the economy near peak employment, the Treasury yield curve flat, corporate profit margins near peak, earnings projected to be flat.<\/p>\n<p>The Fed was on hold indefinitely in February 2020 with short rates at 1.5-1.75%, but a significant minority of Fed officials was projecting a rate hike in 2021.<\/p>\n<p>The flash recession and profit collapse prompted some $5 trillion in deficit-financed fiscal support with more likely, and turned the Fed maximum easy for a long time to come, intent on waiting for a return to full employment and a lasting rise in inflation before making any tightening moves.<\/p>\n<p>So, yes, valuations are higher now and investor expectations could be growing unrealistic.<\/p>\n<p>But Corporate America refinanced itself for years to come at invitingly low rates against a Fed backstop, earnings will be back above their prior peak this year, government is eager to run the economy hot and (arguably) policy makers just executed a repeatable process for short-circuiting a recession.<\/p>\n<h2>Smaller investors rush in<\/h2>\n<p>Another way that things have changed in a year is the headlong rush of smaller investors into the market, feeling invincible after making it through the crash and riding a near-80% rebound in the S&amp;P 500.<\/p>\n<p>Investors&#x27; willingness to gorge on leveraged upside bets in the form of call options in unprecedented volumes and the instant mark-up of new IPOs such as DoorDash, Snowflake and AirBNB to multi-tens-of-billions in market value at towering revenue multiples shows a new more aggressive and risk-tolerant ethos to the tape.<\/p>\n<p>Some of this energy was already starting to flow a year ago, but it hadn&#x27;t gained nearly as much momentum or taken on as much of a viral character. The Russell Micro-Cap Index is up 65% in 3 \u00bd months. Penny-stock volumes have quintupled over the same period. Overall trading volumes are surging even with the indexes rallying \u2013 the reverse of the typical pattern and harkening back to a similar pattern from the late 1990s.\u00a0 Equity inflows in the latest week set a new record.<\/p>\n<p>Social-media stampedes took GameStop shares from $12 to $400 back to $52 the past two months, and then ran Tilray from $18 to $63 back to $29 in two weeks. Meantime, volumes in staid S&amp;P 500 ETFs has sunk toward multi-year lows, apparently not racy enough for the marginal buyer.<\/p>\n<p>That entire litany describing the untamed animal spirits coursing through Wall Street says both that this is a powerful and well-sponsored bull market and that risks of a wild overshoot are building. Then again, everyone is aware they are building and have been sounding alarms for a while.<\/p>\n<h2>Bank of America indicator nearing sell territory<\/h2>\n<p>Does the fact that subsectors of Reddit stocks and faddish green-energy plays get overblown and then punctured without undermining the big-cap indexes say they aren&#x27;t dangerous? Or is the fact that a few days of headlong buying in small short-squeeze stocks late last month triggered a quick 4% S&amp;P 500 spill a warning that the erratic tremors can&#x27;t always be safely dissipated through the market&#x27;s foundation?<\/p>\n<p>A year ago, Bank of America global strategist Michael Hartnett was telling investors to keep playing risk assets &quot;until investors grow more clearly &#x27;euphoric,&#x27; which he expects will mark the moment of &#x27;peak positioning and peak liquidity.&#x27;&quot; Hartnett is holding that same vigil now, his Bull &amp; Bear Indicator correctly keeping investors involved but inching up to a contrarian Sell threshold (which has preceded corrections in the past and was last hit in early 2018).<\/p>\n<p><svg width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"#002F6C\" aria-labelledby=\"title desc\" role=\"img\" focusable=\"false\" data-analytic-id=\"expand-icon\" class=\"InlineImage-background\"><title>Zoom In Icon<\/title><desc>Arrows pointing outwards<\/desc><circle cx=\"10\" cy=\"10\" r=\"10\" fill=\"white\" stroke=\"#002F6C\"><\/circle><\/path><\/svg><\/p>\n<p>All of this goes back to the thought aired here in early January that 2021 presents as a novel blend of 2010 and 1999 \u2013 the first full year of a new bull market riding long-acting recovery forces, blended with the final year of a powerful bull market that blasted through every upside target and created levels of excess that took a couple years to work off.<\/p>\n<p>Interestingly, though, the core of the market captured by the S&amp;P 500 is metabolizing this mixture with a rather steady and well-behaved &#8211; one might even say boring &#8211; uptrend. At least for now.<\/p>\n<p><em>Starting next week, Mike Santoli&#x27;s columns will only be available on <\/em><em>CNBC Pro<\/em><em>.<\/em><\/p>\n<p>Source: <a href=\"https:\/\/www.cnbc.com\/2021\/02\/13\/a-look-at-the-state-of-the-stock-market-once-year-since-its-pre-covid-peak.html\" target=\"_blank\" rel=\"noopener noreferrer\">Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>There are several similarities between the market at its pre-Covid peak on Feb. 19, 2020 and today, including worries about growth stock domination, valuations and [&#8230;]<\/p>\n","protected":false},"author":3,"featured_media":107010,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>A look at the state of the stock market one year since its pre-Covid peak - 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