The S&P 500 index was on the verge of registering its best 12-month performance in the history of the publication of the index on Tuesday, after its spectacular fall in the market downturn a year ago.
If the S&P 500 SPX,
avoids a 2.9% drop on Tuesday, which seemed likely, marking its biggest gain in 12 months for the index since it started being published in 1957, according to Tim Edwards, managing director of investment strategy in S&P Global indices, which owns the Dow Jones Indices.
But in addition to the first anniversary of the US stock market reaching lows seen last year, after the coronavirus pandemic began, the S&P 500 may also be ready for the second notable year of gains.
“After falling almost 34%, it took just five months for the S&P 500 to recover its losses,” wrote Ryan Detrick, chief market strategist at LPL Financial in a note on Monday, referring to the fall of the S&P 500 to a low of March 23, 2020 from its previous peak of February 19, 2020.
Its full recovery was marked last August with the fastest recovery ever for the S&P 500, from a loss of more than 30%, while its gains for the year overshadowed previous turbulent attacks on the financial markets.
“Things have come full circle now, with stocks staging a furious rally, with new rallies occurring around the world as the economy recovers at a record pace,” said Detrick. “To put things in perspective, the S&P 500 also lost 34% in 1987, but that recovery took 20 months to return to new highs.”
Last year’s stock market crash began in the United States in February with the confluence of growing coronavirus infections and new restrictions on travel and business activities, which first pulled the S&P 500 SPX,
Dow Jones Industrial Average DJIA,
and Nasdaq Composite Index COMP,
drop 10% in correction mode and then quickly 20% in the bear market territory
To help prevent a financial crisis, the Federal Reserve reduced its benchmark interest rate to a range of zero to 0.25%, a level it expects to maintain until 2023, and restarted purchases of US central bank bonds in the amount of US $ 120 billion monthly. It also triggered an unprecedented series of pandemic lines of credit, including the purchase of corporate debt for the first time.
After that, it took the U.S. stock market little time to find its balance, with the S&P 500 entering its current bullish run on April 8, 2020, according to Dow Jones Market Data. The Dow Jones recovery started earlier on March 26, while the Nasdaq Composite followed on April 14.
For Dow Jones, a bull market starts when stocks rise 20%, while a drop of 20% marks the start of a bear market. According to its methodology, the shares are always in low or high territory until a reversal of 20%.
Bear to Bull
More optimistic views on the US economic recovery also began to solidify last summer, as progress in the development of COVID-19 vaccines began to emerge.
In July, Moderna Inc. MRNA,
it was offering updates on its candidate vaccine and, a month later, all three major stock indices were reaching new highs.
And now? The United States’ vaccination effort overtook Europe, where German Chancellor Angela Merkel on Tuesday called the dominant British strain of the virus a “new pandemic”, while outlining stricter blocking measures over the next Easter holiday period.
But if history can be a guide for today’s market, the S&P 500 may still be ready for a second year of flag gains.
This chart shows first-year bull market gains averaging 41% for the S&P 500, after six bear market reversals of more than 30% in magnitude since World War II.
Rising markets, after falling more than 30%
LPL Search, FactSet
But the chart also shows second-year gains averaging nearly 17%, while retracements averaged 10.2%.
Reflection phase
Mark Haefele, chief investment officer at UBS Global Wealth Management, said he expects risky assets to see higher as the market enters a “reflecting” phase of recovery, in a note on Tuesday.
The CIO also said that investors should “hunt for income” while preparing for high growth, rising inflation and low interest rates.
Yields on the investment-grade slice of the U.S. corporate bond market of approximately $ 10.5 trillion were last identified at close to 2.27%, according to the ICE BofA Corporate Index, above a bearish pandemic. around 1.79% in January.
Investors are concerned about the potential for increased government bond yields to undermine some of the high pandemic gains seen in the technology and high growth sectors of the stock market, although banks and financial companies may benefit from the ability to charge more. interest to borrowers.
Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors pointed out on Tuesday that interest in cyclical and value-oriented areas of the market drove $ 8 billion in new assets to flow into the market. Selected Financial Sector SPDR Fund
XLF,
so far in 2021. The fund has risen 13.3% in the year to date on Tuesday, surpassing the S&P 500 by about 9%.
The yield of the 10-year Treasury TMUBMUSD10Y,
it was close to 1.65% on Tuesday, after rising seven consecutive weeks to 1.729% on Friday, close to its one-year high.
“Although an acceleration in volatility is normal at this stage of a strong bull market, we think the right investors may want to consider buying the decline,” said Detrick. “The distribution of vaccines, fiscal and monetary stimulus and a robust economic recovery have raised our confidence.”