Surging US stock market is partially justified

S&P 500 goes to within a whisker of full recovery, but the surge in the index is only partially justified.

Article updated: 11 June 2020 10:00am Author: Michael Baxter

I was expecting stocks to fall much further. They say that the time to buy is when “all but the most bullish of investors have turned bearish.” Or as a Lord Rothschild said: “The time to buy is when there is blood on the streets, even if some of the blood is your own."

Well, it didn’t happen. Sure the S&P 500 took a tumble once lockdowns were imposed — at one point it was down by almost a third. But I was expecting it to fall further. At the beginning of this year, the index stood at 3,247. I was expecting it to fall below 2,000. I thought that would be a good moment to buy.

I also expected the recovery to be much slower.

Instead, just three and a half months after the start of lockdowns in the UK and US, the index is now at 3,207 — within a few points of the start of year price. Indeed, it only just 70 points or so from a new all-time high.

For the NASDAQ composite, the index has seen something even more remarkable; it has fully recovered and I as write, stands at a new all-time high.

The FTSE 100 has not performed so well — it still languishes around 15% below the start of year price and even further behind the all-time high set in 2018.

So let’s run that past you again, the US is officially in recession — it will probably see the steepest fall in GDP since the 1930s. The World Bank projects that global output will contract 5.2% this year, the sharpest contraction since 1945-46. And what do the markets do on this news? Why they party like it was VE Day, Christmas Day and Thanksgiving, all rolled into one.

Is it justified?

At first, I did think economic recovery from Covid would be swift. Indeed, I even thought that the massive government stimuli would give the economy the boost it has needed these last ten years.

But two things have made me more cautious. The first is when I understood the risk (I might call it probability) of a second wave of Covid — just as Spanish Flu was at its most deadly with a second wave. The second relates to how this crisis is being seen as a reason to reverse globalisation even further than  pre-Covid. I can not emphasise enough how serious this is.

It seems to be that any logical analysis points to a disastrous second wave — as is happening in Iran already. My current evolving theory is that the UK government realises a second wave is inevitable and has reasoned that it would be best to see this during the summer, when maybe fatalities might be less. So it wants to see this second wave as soon as possible, and thereby create herd immunity while minimising fatalities.

Whether that is right or not, I believe that just as the markets were hopeless in pricing in the risks from Covid at the outset, they are not allowing for the economic disaster that would come with a second wave.

Justified in one respect

But I do think that this crisis will accelerate the move towards digital and automation.

Traditional companies that are good at digital, such as Unilever, may flourish.

But given all of this, I would expect the companies that are making this digital shift possible to thrive.

And sure enough. Apple’s share price is now at a new all-time high — market cap $1.49 trillion. Likewise Amazon (market cap $1.3 trillion), Microsoft ($1.44 trillion), Alphabet ($990 billion), Facebook ($680 billion), Nvidia ($220 billion), Tesla ($174 billion) and Netflix ($190 billion) are either at all-time highs right now, or hit that level within the last few weeks.

These companies are worth over six billion dollars between them, and I would say that these valuations are logical.

And since these companies are an important part of the S&P 500, the surge in this index is at least partially justified. The NASDAQ’s strength is perhaps even easier to justify. And since the sorry old FTSE 100, which is made up of too many old school companies with business models that are struggling to work in the digital age, I would say the way it lags behind US indices is also justified.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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