S&P 500 : Positive in 2020?
(Tue, 14 July 2020). With fundamentals out the window, the S&P 500 Index is back to positive territory for the year. The benchmark has rallied a staggering 45% from the March low. Thanks to record stimulus from the Fed and misguided hopes for a V-shaped recovery, stocks are approaching record highs again.
The S&P 500 is now back to the level it was at the start of the year. Investors are looking past record virus numbers and are focusing on a potential vaccine. The Fed has helped to inflate the market bubble, but it might not last. The S&P 500 just turned positive for 2020, despite record numbers in virus cases over the weekend.
The S&P 500 turned positive for the year on Monday as investors’ optimism towards a vaccine pushed stock prices higher.
What Is Driving The S&P 500 Rally?
Hopes that a vaccine will soon be available is a reliable driver of the market rally. Pfizer (NYSE:PFE) and German biotech BioNTech SE (NASDAQ:BNTX) have obtained “fast track” designation from the FDA for two of the companies’ four vaccine candidates. If ongoing studies are successful and the vaccine candidate receives regulatory approval, companies plan to deliver up to 100 million doses by the end of 2020 and potentially more than 1.2 billion doses by the end of 2021.
The S&P 500 is also rallying on hopes of a V-shaped recovery. In May and June, nonfarm payrolls recorded substantial gains. Other economic indicators, such as PMI and retail sales, also indicated a sharp recovery. Corporate profits are expected to fall by 44% in the second quarter, which would be the most significant drop in quarterly earnings since the fourth quarter of 2008. The market could ignore the sharp decline in profits as long as companies signal recovery on the horizon.
The Fed’s $3 trillion rescue package to avert an economic crisis following the pandemic has fueled the market bubble. The U.S. central bank has pledged unlimited purchases of financial assets to maintain market liquidity, increasing its balance sheet from $4.2 trillion in February to $7 trillion today.
While the vast majority of these purchases were limited to U.S. Treasuries and mortgage-backed securities, the Fed’s commitment to supporting the corporate bond market was enough to spark a frenzy among investors for bonds and stocks. Interest rates near zero and support for credit to large swaths of corporate America have drawn yield-hungry investors back to the stock market.
The Stock Market Bubble Could Pop Soon
Since its March 23 low, the S&P 500 has risen by about 45%. According to a Bank of America survey released in June, 78% of fund managers think equities are overvalued. The S&P 500 forward price-to-earnings ratio is currently 21.5, a level last seen during the dot-com bubble 20 years ago.
Fed President Jerome Powell warned that the economic recovery would take a long time. The International Monetary Fund (IMF) has also issued a warning about the disconnect between asset prices and the economy. At this stage, a crash before year-end seems highly likely.
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