The new bull market for the S&P 500 is about to enter its second year. Now what?


The S&P 500 Index came on the brink on Tuesday of posting its best 12-month performance in the history of the index’s release, following its spectacular fall in the bear market a year ago.

If the S&P 500 SPX,
-0.76%
avoids a 2.9% drop on Tuesday, which seemed likely, will mark its biggest 12-month gain for the index since it began publishing in 1957, according to Tim Edwards, managing director of index investment strategy at S&P Global, that owns the Dow Jones Indices.

But beyond the first anniversary of the US stock market that hit the lows seen last year after the start of the coronavirus pandemic, the S&P 500 could also be poised for the second exceptional year of earnings.

“After falling nearly 34%, it took the S&P 500 just five months to recoup its losses,” Ryan Detrick, chief market strategist at LPL Financial, wrote in a note Monday, referring to the S&P 500 slump to a low of March 23, 2020 from its previous peak of February 19, 2020.

Its full recovery was marked last August with the fastest rebound in the S&P 500’s history since a loss of more than 30%, while its gains for the year overshadowed previous episodes of turmoil in financial markets.

“Things have come full circle now as stocks have rallied furiously, with new highs around the world as the economy recovers at a record pace,” Detrick said. “To put things in perspective, the S&P 500 also lost 34% in 1987, but it took 20 months for that recovery to return to new highs.”

Last year’s stock market crash began in the US in February with the confluence of rising coronavirus infections and new restrictions on travel and business, which first pulled the S&P 500 SPX.
-0.76%,
Dow Jones Industrial Average DJIA,
-0.94%
and Nasdaq Composite Index COMP,
-1.12%
up to 10% in correction mode, then quickly 20% lower in bear market territory.

To help avoid a financial crisis, the Federal Reserve drastically lowered its benchmark interest rate to a range of zero to 0.25%, a level it hopes to hold until 2023, and restarted purchases of central bank bonds to the tune of $ 120 billion monthly. It also sparked an unprecedented list of pandemic credit facilities, including buying corporate debt for the first time.

After that, the US stock market took little time to find its equilibrium, with the S&P 500 entering its current bull market on April 8, 2020, according to Dow Jones Market Data. The Dow’s recovery began in early March 26, while the Nasdaq Composite followed on April 14.

For Dow Jones, a bull market begins when stocks rise 20%, while a 20% drop marks the beginning of a bear market. According to their methodology, stocks are always in bull or bear market territory until a 20% reversal.

Bear to bull

The most optimistic views on the US economic recovery also began to solidify last summer as progress began to emerge in the development of COVID-19 vaccines.

By July, Moderna Inc. MRNA,
-6.24%
was offering updates on its vaccine candidate and a month later, the three major stock indices were hitting new all-time highs.

And now that? The US vaccination effort has overtaken Europe, where German Chancellor Angela Merkel on Tuesday called the dominant variant of the virus in the UK a “new pandemic”, while outlining tougher lockdown measures during the next Easter holiday period.

But if history can be any guide to today’s market, the S&P 500 could still be poised for a second year of banner earnings.

This chart shows that first-year bull market gains averaged 41% for the S&P 500, following six bear market reversals of greater than 30% magnitude since World War II.

Bull markets, after a drop of more than 30%

LPL Investigation, Fact Set

But the chart also shows that second-year gains averaged nearly 17%, while pullbacks averaged 10.2%.

Reflation phase

Mark Haefele, chief investment officer at UBS Global Wealth Management, said he expects risk assets to see further gains as the market enters a “reflation” phase of recovery, in a note Tuesday.

The CIO also said investors should “look for returns” while also preparing for high growth, rising inflation and low policy interest rates.

Yields on the investment-grade portion of the U.S. corporate bond market of roughly $ 10.5 trillion were last detected near 2.27%, according to the ICE BofA Corporate Index, up from a pandemic low of roughly 1.79% in January.

Investors have been concerned that rising government bond yields may weaken some of the high pandemic gains seen in the technology and high-growth sectors of the stock market, although banks and finance companies could benefit. of the ability to charge more. interest to borrowers.

Matthew Bartolini, SPDR Americas head of research at State Street Global Advisors, noted Tuesday that interest in the cyclical and value-oriented areas of the market led to $ 8 billion in new assets flowing into the market. Select Financial Sector SPDR Fund
XLF,
-1.40%
so far in 2021. The fund was up 13.3% year-to-date on Tuesday, outperforming the S&P 500 by about 9%.

The yield of the 10-year Treasury bonds TMUBMUSD10Y,
1,631%
it was close to 1.65% on Tuesday, after rising seven weeks in a row to 1.729% on Friday, close to its one-year high.

“While a spike in volatility would be normal at this stage of a strong bull market, we think the right investors may want to consider buying the dip,” Detrick said. “Vaccine distribution, fiscal and monetary stimulus, and a solid economic recovery make our confidence high.”

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