US stock market reaches all-time high at closing
Stunning turnaround propelled by Big Tech, stimulus props up battered economy.
The U.S. stock market closed at an all-time high Tuesday, staging a stunning turnaround propelled by Big Tech as trillions of dollars in stimulus aid from the Federal Reserve and Congress helped prop up an American economy gripped by recession.
The resurgence comes despite a backdrop of historic job losses, bankruptcies and shrinking corporate profits after the economic fallout from the worst global pandemic in a century and one of the sharpest downturns since the Great Depression. The U.S. leads the world in coronavirus cases, recently surpassing 5.4 million, or roughly a quarter of global infections.
Still, investors have shrugged off a string of dismal economic data in recent months and a spike in outbreaks, opting to instead scoop up stocks at bargain prices as optimism grows for an economic recovery with further stimulus and a vaccine. Investors have also gained confidence from a strong housing market, improved consumer spend
ing and better-than-expected second-quarter corporate profits.
“The new all-time highs will be met with disbelief, but the way people view the economy and the stock market is consistently wrong,” says Michael Antonelli, market strategist at Baird. “In the short run, financial markets don't trade on good news or bad news. They trade on whether things are getting better or worse.”
There have been signs of improvement in the labor market recently. The number of Americans seeking jobless benefits dropped to 963,000 for the week ending Aug. 8, falling below 1 million for the first time since the shutdown began in the spring, the Labor Department said Thursday. The figures still remain above a peak of 665,000 in March 2009 following the aftermath of the global financial crisis.
The S&P 500 rose 0.2% to close at 3,389.78 on Tuesday, breaking past its previous Feb. 19 high to finish at the highest closing level on record. The Dow Jones industrial average fell 66.84 points to 27,778.07, off about 6% from its Feb. 12 peak. The Nasdaq Composite, which had rebounded to records in June, climbed 0.7% to 11,210.84, touching another high Tuesday.
Investors who sat on the sidelines during the market turbulence in the spring lost out on gains. If an investor had put $10,000 in an S&P 500 index fund on Dec. 31, 2019, it would have been worth $10,594.57 with dividends this year through Monday, according to S&P Dow Jones Indices.
Tech rally propels record run
High-flying stocks such as Apple, Microsoft and Google parent Alphabet have powered this year’s rally, outpacing the rest of the market as investors bet heavily they could prevail in a stay-at-home economy. Apple is closing in on a $2 trillion valuation for the first time.
Big Tech makes up an outsize portion of the S&P 500, and the performance of the biggest stocks can have a disproportionate effect on the index. These companies typically derive a large portion of their revenues from outside of the U.S., making them more immune to the economic challenges from the pandemic than domestic companies.
The return to all-time highs comes after stocks suffered steep losses following a downturn where the S&P 500 tumbled about 34% to a low on March 23, snapping a 11-year bull market run.
It took less than five months for the S&P 500 to go from its nadir to a fresh record on Tuesday. That makes this year’s bear market, or a drop of more than 20% from a peak, the shortest in history at 1.1 months from the S&P 500’s previous high on Feb. 19 to its low on March 23, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Vaccine hopes, further stimulus bets fuel markets
Since the March lows, stocks have rebounded more than 50% after the U.S. central bank and lawmakers in Washington provided an unprecedented amount of financial aid to shore up the economy, which has helped rejuvenate optimism about future growth.
There could be more room for stocks to run in the coming months, analysts say. The stock market is betting that the pandemic will end eventually with a vaccine, and with help from better treatments in the interim. But any setback in the timeline for developing a vaccine could challenge the rally, they added.
“So much of this hinges on a vaccine,” says Ryan Detrick, senior market strategist at LPL Financial. “It’s going to take a long time for the economy to get back to where it was before the pandemic. But the likelihood of a vaccine over the next six to 12 months has boosted investor optimism as the economy slowly reopens.”
Investors eye risks
Still, there are challenges ahead that could threaten the stock market’s latest rally, including a second coronavirus wave, followed by simmering U.S.-China trade tensions and the upcoming presidential election in November, according to a Bank of America survey.
Some market professionals worry that a stalling U.S. economic recovery could slow the stock market gains. Investors hope for another coronavirus rescue package from Congress to help sustain the recovery, but talks among Republicans and Democrats hit a stalemate this month.
This comes at a time when unemployment remains historically high and the enhanced jobless aid expired at the end of July, which many people view as a vital lifeline.
“It would be problematic to remove money from Americans’ pockets during a pandemic in a consumerbased economy,” says Antonelli. “It’s political wrangling. The framework is there for more stimulus. Now it’s about getting it all enacted.”
Why stocks are rallying in a recession
Higher stock prices during recessions aren’t unusual. Stocks have risen during seven of the past 12 recessions going back to World War II, with a median advance of 5.7%, according to LPL Financial.
To be sure, the U.S. economy has recovered just 42% of the 22 million jobs lost to the pandemic-induced recession, according to the Labor Department. And the economy saw its worst quarterly decline ever in the second quarter as a result of the pandemic.
But that has done little to disrupt the stock market, which has remained resilient. One reason why, analysts say, is because investors view the markets as forward-looking.
“The unemployment reports and the GDP data aren’t earth shattering to investors because the data is old,” says J.C. Parets, founder of research firm All Star Charts. “It's not that the data doesn’t matter. It's that the market is pricing in what will happen six to twelve months from now, not what happened six months ago.”