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Small-caps, cheap stocks and cyclical plays are all on firmer footing this week, ignoring the dire economic and earnings data that’s only getting worse in the background. Their strength has pushed the market to another milestone: More than half the S&P 500’s members are trading above their 50-day moving average for the first time since late February, a swift rebound from the low single-digits just a month ago.
The S&P 500 is in the midst of an astonishing run, with stocks posting one of the fastest recoveries on record over the past few weeks. Partly, it’s a response to improving coronavirus trends and the loosening of shelter-in-place decrees. To others, though, it’s a continued reaction to the unprecedented fiscal and monetary measures that are helping thrust equities higher despite deteriorating data and severe dysfunction in the commodities markets.
“Asset prices aren’t just reacting to economic recovery — they’re more willing to react to stimulus measures,” said Yousef Abbasi, global market strategist at INTL FCStone. “And you have a flood of stimulus in this market.”
The Federal Reserve and Congress have announced a deluge of measures aimed at shoring up the U.S. economy and easing dislocations in credit markets. The alphabet soup of facilities set up to buy troubled assets or loan to cash-strapped companies seemingly grows by the week. On Monday, for instance, the central bank expanded its municipal-debt program to cover smaller cities and counties. More is likely to come from Congress, too, as legislators start to work on the next phase of aid.
The Fed’s balance sheet has already ballooned to a record $6.57 trillion as the central bank continues its robust purchases. It could reach as much as $12 trillion and top 50% of gross domestic product by the end of the year, according to Bloomberg Economics. The balance sheet troughed at 18% of GDP in 2019.
To Tony Dwyer at Canaccord Genuity, the Fed’s actions have been “game-changing.” When the central bank announced a fresh stimulus package in early April, he and his team took the worst-case scenario off the table.
“It wasn’t the amount of money that was important (although that is incredible), it was the fact that as soon as the Fed saw an area of stress, it attacked it with an incredible amount of money,” Dwyer wrote in a note. “It is clear the Fed and Congress are just going to keep providing money until it works.”
Though consumer confidence and retail sentiment have fallen sharply in recent weeks, some readings are still above the record lows reached during the 2008-2009 and 1990 crises and may not drop to those same levels again, according to Mike Wilson, chief U.S. equity strategist at Morgan Stanley (NYSE:MS).
“With the stimulus so large and directed right at the consumer and small businesses, we may be surprised at how well the consumer fares in what is amounting to the steepest decline in economic activity in history,” he wrote in a recent note.
Earlier: Nothing Is Certain But Bailouts: How Stimulus Works in a Vacuum
All that largess continues to push up stocks, which have already retraced about half their virus-induced losses. While the advance was for a while confined to a handful of defensive names and the mega-cap tech firms that led the bulk of the recovery, the makeup of those benefiting has started to shift in recent days. Small-cap stocks bested their larger peers for the second day Tuesday, with the gap between the two at its widest in about a decade.
It’s also meant a changing of the guard among market leaders.
More economically-sensitive S&P 500 sectors, including financials, materials and industrials are among the leaders this week. And the equal-weighted version of the gauge rose as much as 2.8% Tuesday while the market-cap weighted index declined. Some of the largest tech stocks, including Apple Inc (NASDAQ:AAPL)., Alphabet (NASDAQ:GOOGL) Inc., Microsoft Corp (NASDAQ:MSFT). and Amazon.com Inc (NASDAQ:AMZN). are lagging this week, with the latter two among the biggest drags on the S&P 500 Tuesday.
Of course, not everyone is convinced that the recent rally is justified.
To Jason Thomas, chief economist at AssetMark, stocks have become overly optimistic. “The economic policy is winning the battle for the hearts and minds of the market but not the arms and legs of the economy,” he said in an interview. “That’s what I think is the disconnect.”
©2020 Bloomberg L.P.
