Written by Tess Britton
On Tuesday, August 17th, 2020, amidst a global pandemic and hard-hitting recession, the S&P 500 closed at a record. Earlier in March, the stock market was at rock bottom; the end of a bear market that started in February and the beginning of a bull market.
The bull and bear market idea are terms that investors use to describe different moments in time to buy a stock. The difference between the two is that in a bear market, investors are typically pessimistic, and the stock prices are falling. Conversely, in a bull market prices are expected to rise and are therefore optimistic. More specifically, entry into a bear market begins when stocks have fallen 20 percent from their high. A bull market begins when the stocks have reached a low (Chen Feb 28, 2020).
This year’s bear market was recorded as one of the shortest in history as depicted from the S&P Dow Jones overview page. In this graph, the bear market is the downward sloping section seen at the beginning of 2020.
Back in March where S&P stock prices hit their low is when the bull market began to take over. Only five months later on a Tuesday afternoon, the S&P 500 stock sold out at record speed.
The recession caused by COVID-19 has left unemployment reaching double digits with some economists comparing this crisis to have sunk to levels comparable to the Great Depression. During this difficult time, it is hard to understand how the S&P 500 has been doing so well as of late.
The S&P 500 is a collection of the top 500 companies in U.S. stocks. This index is widely used by investors because it gives a good indication of movement in the U.S. market as a whole.
First, it is important to look at the key differences between GDP and the stock market; both of which are indicators of the state of an economy. For the purposes of this article, it is easiest to focus on the stock market index, S&P 500.
The S&P 500 is mostly based on manufacturing while GDP is based on services. In a pandemic, manufacturing of products continues despite quarantining. On the other hand, when a country goes in lockdown, services like restaurants and stores come to a screeching halt.
Apart from this, the S&P 500 is investment driven while GDP is determined by consumption. During the quarantine, GDP is affected because consumer consumption has decreased given the circumstances of the pandemic. For example, people are unable to go out to eat or get your hair done.
In contrast, investors have not been thinking about the pandemic in its current state. Instead, investor habits have changed to be focusing on the future and looking optimistically at what the world will look like in six to eighteen months. The pandemic has an end date and investors are counting on it.
Ryan Detrick, senior market strategist at LPL Financial, spoke on USA today and stated that “It’s not so much about good versus bad news. The market cares about whether things are getting better versus worse. The economy is still nowhere near its output prior to the pandemic. But things are getting better”.
Because a vaccine seems to be something in the relatively near future, it is wise for investors to be investing in technology that would be successful when this catastrophe is over.
Additionally, retail has done considerably well during this pandemic. Given that much of the S&P 500 companies are dependent on retail, a rise in these stock prices follows. In fact, about 40% of S&P 500 is classified as technology, digital retail, or e-commerce. All of these companies are “stay-at-home” companies which allow them to do well despite the pandemic.
CFA’s vice president Jeffrey Buchbinder commented on these stock price trends and described the S&P 500 companies as “some of the most defensive industries within the consumer staples, telecom, and utilities sectors, and more than half of the S&P 500 Index is well positioned for this difficult environment” (LPL Financial). High sales are good news for investors which consequently lead to a rise in stock prices.
The economic impact of the pandemic has also led to government aid from the treasury department. According to LPL financial, stimulus from the Federal Reserve has driven the money supply about 25% above last year’s levels.
All this aid and money entering the economy will result in inflation which provides further incentives for investors to put their money in stocks rather than in cash or bonds. Currently, U.S. Treasury bonds yield about a 0.5% interest rate while investment return for stocks are considerably higher.
A graph from LPL Financial Research shows the relationship between money supply growth and stock market performance; therefore, demonstrating the upwards trend in stock investment. In this graph it is important to note that it is graphing the percent change in growth in both the S&P 500 Index and US money supply. In mid 2020, when the coronavirus pandemic hit the US, money supply dramatically increased, consequently causing a rise in the stock price index as well.
Though it may seem counterintuitive, recessions are typically good for the stock market. In fact, the LPL Weekly Market Commentary proved that stock prices have risen in seven out of the twelve past recessions. All in all, despite the downturn of the economy, the stock market has remained strong.
Appendix
Menton, J. (2020, August 19). How did the stock market hit a record amid COVID-19 fueled recession?
Here’s what experts say about the rebound. USA Today.
S&P 500 overview. S&P Dow Jones Indices. https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
LPL Research. (2020, August 10). Weekly Market Commentary: Dissecting the Disconnect. LPL Financial. Retrieved August 23, 2020, from https://www.lpl.com/news-media/research-insights/weekly-market-commentary/dissecting-the-disconnect.html
Chen, J. (2020, February 28). Investing essentials: Bull Market [Fact sheet]. Investopedia. Retrieved August 23, 2020, from https://www.investopedia.com/terms/b/bullmarket.asp