Technicals have been carrying the stock market higher, but it is becoming a heavier burden.
The rhetoric repeated frequently and loudly in the marketplace lately is that stocks “just want to go higher.” This highlights the leading role played by market technicals, or what I think of as determining the path of least resistance for risk appetites.
Fueled most recently by the robust involvement of retail investors, these technicals first turbocharged a rally triggered both by corporate and economic fundamentals that were better than expected and consistently supportive monetary policies. Then they were instrumental in brushing off one new troubling question after another about these same fundamentals. Finally, they helped tip a stalemate between fundamentals and policies in favor of already-elevated stock valuations. But this is becoming a heavier burden, especially as more of a spotlight is placed on their dynamics.
The three main U. S. stock indexes have rallied 39% to 45% from their lows on March 23. In the process, the S&P 500 is almost back to flat for the year (down 4%), outperforming the all-world index in the process. The Nasdaq has done a lot better, returning 11% year-to-date, while the Dow is down more than 9%.
There have been several phases to the impressive stock market rebound from the March low.
Slightly less negative health indicators — that is, a rate of worsening in Covid-19 illness that started to defy worst-case scenarios — and, initially more important, huge fiscal and monetary policy interventions, helped sharply reverse the typical liquidity-exaggerated slump that tends to take place when asset prices hit a sudden big air pocket. The upward move in prices was strengthened by additional Federal Reserve support that, in a surprising move, went as far as the once-unthinkable purchasing of junk bonds.
The resulting spike attracted the attention and, more important, greater involvement of retail investors. They emphasized individual stocks that had notably lagged in the initial phases of the rally, a decision that was quickly validated by the boost given to “reopening” stocks powered by initial indications that the relaxation of the economic lockdowns in China and then Europe and the United States were proceeding in a healthy manner.
