This week the S&P 500 closed at an all-time high. After plunging 40% to March the index has recovered all of that and more to close above the highs reached last February and is up over 5% for 2020 so far. Though this is good news for investors, there are many unique aspects of this rally to be aware of.

The Tech Bump

While the S&P 500 is back to all time highs, other indices are not. This has a lot to do with tech stocks. Tech makes up about a quarter of the S&P 500 and has been on a tear since the virus hit. Some analysts argue that the changes resulting from the virus have pushed a decades worth of tech adoption into just a few months. This means that online retail and adoption of online services are where we expected to see them in 2030 if the virus had not hit. Of course, one might question whether usage will stay at those levels should the virus recede, but for now, tech firms are benefiting from social distancing trends which generally mean more usage of tech.

The much-watched S&P 500 is well-positioned for this trend with the likes of Microsoft

MSFT
, Apple

AAPL
, Googl

GOOGL
e, Facebook and Amazon

AMZN
among others it has more tech than most other indices and those names have a big weight in the index. That’s why the NASDAQ

NDAQ
was back to all-time highs 2 months ago, but other indices that are less tech heavy like the Dow Jones and Russell 2000 still aren’t there. This is also why your portfolio may be lagging the market if you don’t own much tech in your portfolio today.

Stimulus

The stimulus in response to the recession has been quick and substantial. In Q2 in the U.S. the size of the Fed’s actions and the policies such as the CARES Act from lawmakers did a great deal to offset the pain of lockdown economics. Yes, unemployment is over 10%, which is extremely high, but up until July the unemployed were receiving a bonus payment of $600 a week. Checks to Americans of $1,200 helped too. This meant that consumers were still able to spend despite a bleak economic outlook. Then the Fed’s policies and the Paycheck Protection Program (PPP) helped businesses. As a result the economic pain, at least so far, has not been as bad as it might have been. That said, the apparent deadlock on future stimulus and the limited scope of executive orders could become a problem down the road. Ironically. it could take a drop in the markets to prompt stimulus negotiations to resume.

Lower Rates

The canonical trade off in investing is between stocks and bonds. Many portfolios hold both. Now rates are far lower than at the start of 2020. The Treasury 10-year paid 1.6% interest as the virus started, now it offers 0.6%. At these very low levels of interest rates, stocks, though potentially riskier, look more attractive to some. Dividends aren’t equivalent to the interest on a bond, but for those searching for yield, stocks may seem a better buy than bonds at these very low levels of interest rates.

A Short Recession?

Finally this recession is likely unusual and potentially short. The recession may already be over. This has as much to do with technical definitions of unemployment as getting back from 10% unemployment could take years, but the U.S. economy, in aggregate, is likely growing again. Hence certain investors are willing to look through the major dip towards the upward trend that’s expected.

So there are clear reasons why the S&P 500 is back to all-time highs. Still it does have a lot to do with the tech sector at this point, and it may be some time before the broader economy catches up. Now it’s as true as ever that the stock market is not the economy.



Source Google News