The S&P 500 Index has been flirting with a new all-time high the past few days and is currently less than half a percent away from exceeding the last all-time high set on February 19.
What a different world it is from that last new high, as we’ve experienced one of the worst recessions ever, seen the fastest ever bear market decline and a historic market rally, while millions of people have lost their jobs and tragically more than 160,000 Americans have lost their lives (John Hopkins).
Yesterday also marked 100 trading days ago since the March 23 low and the S&P 500’s best 100-day rally ever, up more than 50%. As the LPL Chart of the Day shows, previous large 100-day rallies usually saw continued gains, with stocks higher a year later 17 out of 18 times.
“2020 is a year that is setting many records, some good and some bad, and now we have the best 100 day rally ever,” said LPL Financial Chief Market Strategist Ryan Detrick. “The real catch to this though is that previous big rallies usually saw continued strength, so don’t bet against this bull market just yet.”
Still, the number one question we continue to receive is how can stocks be back near highs, while the economy isn’t anywhere close to previous levels of output? We tackled this tough question this week in Dissecting the Disconnect, focusing on how the S&P 500 Index and Gross Domestic Product (GPD) are actually quite different.
Some of the key differences include:
- The S&P 500 is more manufacturing driven, while GDP is more services driven. The services economy was harder hit during the lockdowns and faces a tougher road back with social distancing than manufacturing.
- The S&P 500 is more investment driven rather than consumption driven. Capital investment has been supported by technology spending and has not been hit as hard as consumer spending during the pandemic. As a result, the S&P 500 has been more resilient to the pandemic. We also believe the value of tech-based intellectual property is better captured by the S&P 500 and its profits rather than the GDP calculation.
- The S&P 500 is global, while GDP is domestic. Roughly 40% of the sales for the S&P 500 are derived overseas, while US exports in the GDP calculation only make up 13% of US GDP. The US economy is a net importer, while the S&P 500 is a net exporter, which is why the S&P 500 prefers a weaker US dollar. A weaker dollar helps many US companies’ goods cheaper overseas and enhances international profits, while a strong dollar is good for US GDP because it lowers the cost of imports.
- The S&P 500 likes higher oil, while GDP likes cheaper oil. Profits for the energy sector benefit from higher oil prices, but higher energy costs crimp consumer spending. The industrials sector also generally benefits from higher oil prices through capital spending by energy producers.
Lastly, the S&P 500 Index has been stuck on unlucky 13 in terms of all-time highs this year. The strength we’ve seen recently does bode well for continued momentum and eventual new highs probably soon.
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