A look at the stock market situation a year since its pre-Covid peak

Despite all the unprecedented events and unforeseen consequences of last year, market conditions today rhyme with those of mid-February 2020, when stocks peaked just before the Covid crash.

In the six months prior to February 19, 2020, the peak of the indices, the S&P 500 gained 15.8% for a series of new historical highs. Today, the index is at 15.9% in the last six months and has been breaking new records for most of that period.

Much of what is said around the market is also similar: concerns that a large part of the market will be dominated by some high-growth stocks (S & P’s top five stocks were 20% of the index at the time and 22% today) and this investor sentiment may have become too complacent.

So, as now, S&P was at a 20-year high in terms of valuation, the term price / earnings ratio, then slightly above 19 and now exceeding 22 – but for those who choose to compare equity yields with Treasury yields, the difference is very close: 3.7 percentage points, then against 3.3 now.

The spread on high-yield bonds made an almost perfect trip last year, staying exactly at extreme lows, which fits the feeling that generous credit markets are lubricating the economy and markets.

See how this support for forgiving capital assets from the debt capital markets was featured in this column a year ago this weekend:

“Real yields on investment-grade corporate bonds are just over zero. The Chicago Fed’s National Financial Conditions Index shows that the liquidity scenario is as loose as it has been in this cycle … A clear majority of S&P 500 has dividend yields in excess of 10 years Treasury yield. While it is not a perfect relative value indicator, it tends to provide protection under equity valuation. “

All of this is also true today. And the same thing happens with the feverish purchase of a handful of expensive “history stocks”, which excites younger and more aggressive investors, while making traditionalists a little nervous.

A year ago: “A grouping of what might be called ‘idiosyncratic speculative growth’ stocks is also doing quite happily this year, a sign that investors are aggressively holding on to the next big thing (or maybe just the next one). fast money).” Then it was Tesla, Beyond Meat and Virgin Galactic. Today, there are dozens of names, from GameStop to Canadian cannabis, fuel cells and early-stage fintech apps.

Therefore, the echoes are very clear as this anniversary approaches. The differences, however, are diverse, important and make the current market more dynamic in favorable and – potentially, eventually – dangerous ways.

Let’s make it clear that observing a similar market configuration now is not remotely to predict something like a repeat of the market collapse and the economic calamity that began to unfold at the end of February last year. The spread of the coronavirus was a genuine external shock, the forced global economic downturn was the first, a 35% free fall in five unprecedented weeks.

Which brings us to some of the most crucial differences between now and a year ago. The collapse zeroed the clock on the economic cycle and political positions. From 2019 to 2020, Wall Street was caught in a late-cycle wake, with the economy near the peak of jobs, the Treasury yield curve flat, corporate profit margins near the peak, profits projected to remain stable.

The Fed was on hold indefinitely in February 2020 with rates sold at 1.5-1.75%, but a significant minority of Fed officials projected an increase in rates in 2021.

The rapid recession and the collapse of profits generated about $ 5 trillion in deficit-financed fiscal support most likely, and made the Fed’s maximum easy for a long time, with the intention of waiting for a return to full employment and a lasting increase inflation before making any tightening movements.

So yes, valuations are higher now and investor expectations may be getting unrealistic.

But Corporate America has refinanced for years at invitingly low rates against a Fed barrier, profits will return above their previous peak this year, the government is eager to keep the economy warm, and (possibly) lawmakers have just run a repeatable process to soon -circuiting a recession.

Another way things have changed in a year is the rush of smaller investors in the market, feeling invincible after going through the crisis and enjoying an almost 80% recovery in the S&P 500.

Investors’ willingness to gorge themselves on high-leveraged bets in the form of call options in unprecedented volumes and the instant marking of new IPOs, such as DoorDash, Snowflake and AirBNB, for several tens of billions in market value in multi-show increased revenue and a new, more aggressive and risk-tolerant ethos for the tape.

Some of that energy had been starting to flow for a year, but it hadn’t gained so much momentum or taken on so much of a viral character. The Russell Micro-Cap index rose 65% in 3 ½ months. Penny stock volumes have quintupled over the same period. General trading volumes are rising even as the indexes recover – the reverse of the typical pattern and returning to a similar pattern from the late 1990s. The stock inflows in the past week have set a new record.

The social media stampede took GameStop’s stock from $ 12 to $ 400 to $ 52 in the past two months, and then took Tilray from $ 18 to $ 63 back to $ 29 in two weeks. Meanwhile, volumes of sober S&P 500 ETFs have dropped to several-year low levels, apparently not bold enough for the marginal buyer.

All that litany that describes the untamed animal spirits that roam Wall Street says that this is a powerful and well-sponsored bull market and that the risks of a wild overshoot are growing. Then again, everyone is aware that they are building and have been giving off alarms for some time.

Does the fact that subsectors of Reddit stocks and trendy green energy games are overblown and then drilled without undermining the big cap indices say they are not dangerous? Or the fact that a few days of hasty purchases of small stocks at the end of last month triggered a rapid 4% spill on the S&P 500 a warning that erratic tremors cannot always be safely dispelled by the market base?

A year ago, Bank of America global strategist Michael Hartnett was telling investors to continue playing risky assets “until investors are more clearly ‘euphoric’, which he hopes will mark the moment of ‘peak positioning and liquidity of peak'”. Hartnett is supporting this. same vigil now, its Bull & Bear indicator correctly keeping investors engaged, but advancing to an opposite sales limit (which preceded corrections in the past and was last reached in early 2018).

It all goes back to the thinking conveyed here in early January that 2021 presents as a new mix of 2010 and 1999 – the first full year of a new bull market building long-term recovery forces, combined with a bull’s last year. powerful market that surpassed all positive targets and created levels of excess that took a few years to function.

Interestingly, however, the core of the market captured by the S&P 500 is to metabolize this mixture with a very stable and well-behaved upward trend – it might even be boring. At least for a while.

Starting next week, Mike Santoli’s columns will be available only at CNBC Pro.