A look at the state of the stock market a year after its heyday before Covid

For all the unprecedented events and unforeseen consequences of last year, market conditions today rhyme quite closely with those of mid-February 2020, when stocks reached their peak before the Covid crash. .

In the six months leading up to the February 19, 2020 index crest, the S&P 500 had gained 15.8% to a series of new all-time highs. Today, the index has risen 15.9% in the last six months and has been clicking to get new records for most of that period.

Much of the talk around the market is also similar: it worries that too much of the market is dominated by huge growth stocks (the top five S&P shares were then 20% of the index and today are 22%) and that investor sentiment may have become too complacent.

Then, as now, the S&P stood at a maximum of 20 years in terms of valuation, the price / profit ratio at just above 19 and now exceeding 22, although for those who choose to comparing the returns of wealth benefits with the returns of the Treasury, the gap is quite close: 3.7 percentage points, compared to 3.3, now.

The difference in high-yield bonds has made a round trip almost perfect over the past year, at extreme lows, which fits in with the sense that generous credit markets are lubricating the economy. and markets.

This feature of supporting forgiving debt capital market assets was characterized this weekend this weekend:

“Real yields on investment-grade corporate bonds are barely above zero. The Chicago Fed’s national index of financial conditions shows that the liquidity fund is as weak as this cycle has been … A clear most S&P 500 shares have dividend yields in excess of ten years Treasury yield. While there is no perfect relative value indicator, it tends to provide a cushion below the valuation of equity. “

All this is also true today. And so is the buying fever in a series of expensive “history stocks” that excite younger and more aggressive investors while putting traditionalists a little nervous.

A year ago: “A cluster of what might be called ‘idiosyncratic speculative growth’ stocks is also acting quite strongly this year, a sign that investors are aggressively taking the next big thing (or maybe just the next quick investment).” Then there were Tesla, Beyond Meat and Virgin Galactic. Today there are several dozen names, from GameStop to Canadian cannabis to fuel cells to early-stage fintech applications.

So the echoes are pretty clear as this anniversary approaches. However, the differences are diverse, important, and make the current market more dynamic in favorable and potentially dangerous ways.

Let us be clear that observing the similar market configuration now is not to remotely predict anything like a repeat of the market collapse and the economic calamity that began to unfold in late February last year. The spread of the coronavirus was a real external shock, the forced global economic downturn, the five-week free fall and an unprecedented 35%.

Which brings us to some of the most crucial differences from now and a year ago. The collapse restored the clock of the economic and political cycle. From 2019 to 2020, Wall Street was caught in a late-cycle eve, with the economy nearing maximum employment, the flat Treasury yield curve, corporate profit margins almost maximum and the projected benefits will be flat.

The Fed stopped indefinitely in February 2020 with short rates of between 1.5 and 1.75%, but a significant minority of Fed officials projected a rate hike in 2021.

The rapid recession and collapse in profits were more likely to result in some $ 5 trillion in deficit-financed tax support, and provided the Fed’s maximum for a long time, with the intention of waiting for the return to full employment and a lasting rise in inflation before making any tension move.

So yes, valuations are higher now and investors ’expectations could be unrealistic.

But Corporate America was refinanced over the next few years at attractive and low rates against the Fed, profits will once again exceed their maximum this year, the government is eager to run the economy and (possibly) policymakers they just run a repeatable process — circuitizing a recession.

Another way things have changed in a year is the influx of smaller investors into the market, feeling invincible after going through the crash and bouncing about 80% of the rebound in the S&P 500.

The willingness of investors to take advantage of leveraged growing bets in the form of call options in unprecedented volumes and the instant expansion of new IPOs, such as DoorDash, Snowflake and AirBNB, with a market value of several tens of millions of dollars, with multiple incomes. a new, more aggressive and risk-tolerant ethos on the tape.

Part of that energy had already started flowing a year ago, but it hadn’t picked up nearly as much momentum or acquired a viral character. The Russell Micro-Cap index has risen 65% in 3 and a half months. Cents volumes have quintupled over the same period. General trading volumes increase even with the recovery of the indices: the reverse of the typical pattern and returns to a similar pattern of the late nineties. Last week’s equity entries set a new record.

The prints on social media picked up GameStop shares from $ 12 to $ 400 to $ 52 in the past two months and then ran Tilray from $ 18 to $ 63 to $ 29 in two weeks. Meanwhile, stable S&P 500 ETF volumes have fallen to multi-year lows, apparently not rational enough for the marginal buyer.

All this litany describing the pet spirits crossing Wall Street says that this is a powerful and well-sponsored bull market and that the risks of a wild overflow are increasing. Once again, everyone is aware that it is building and has been sounding alarms for some time.

Does the fact that the subsectors of Reddit stocks and fadish green energy games explode and puncture themselves without undermining capitalization indexes, says they are not dangerous? Or is it the fact that a few days of quick buying of small quick compression stocks late last month caused a quick 4% S&P 500 range a warning that erratic tremors can’t always be safely dissipated through the foundation of the market?

A year ago, Bank of America global strategist Michael Hartnett told investors to continue playing risky assets “until investors grow more clearly“ euphoric, ”which he hopes will mark the moment of maximum positioning and Maximum liquidity. ”Hartnett argues that the same eve now, its Bull & Bear indicator keeps investors properly involved but rises to an opposite sell-off threshold (which has preceded corrections in the past and has been last affected in early 2018).

All this goes back to the thought issued here in early January that 2021 presents itself as a new mix of 2010 and 1999: the first full year of a new bullish market with long-term recovery forces, combined with the last year of a powerful bull a market that exploited all the targets on the rise and created levels of excess that took a couple of years to operate.

Interestingly, however, the core of the market captured by the S&P 500 is to metabolize this mix with a fairly stable and well-behaved uptrend (it could even be said to be boring). At least for now.

Starting next week, Mike Santoli’s columns will only be available at CNBC Pro.