It made perfect sense when the stock market plunged 34 percent in just 23 trading days in February and March. That’s when the coronavirus expanded from a Chinese domestic crisis into a sprawling pandemic, creating economic entropy around the globe.
But the furious surge by stocks to new records since prices bottomed out at the tail end of March? Bonkers.
We’ve had a bull market fueled by virtually free money from the Fed, a handful of tech monopolies, and a truckload of wishful thinking about a V-shaped recovery and a vaccine delivered in record time. Forget that the Labor Department said Thursday that another 881,000 Americans filed new claims for unemployment benefits last week, adding to the 29.2 million people who were receiving them in mid-August. Or that the economy contracted at a 33 percent annual pace in the second quarter, a record reported by the Commerce Department last week.
So it’s really no surprise that after climbing to a new peak on Wednesday, the Standard & Poor’s 500 tumbled 3.5 percent Thursday, its biggest one-day drop since June 11. The tech-laden Nasdaq fell 5 percent from its all-time high the day before. And the Dow Jones average, which had yet to retake its pre-pandemic summit, declined 808 points, or 2.8 percent.
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“The last couple of weeks have felt very exuberant,” said Shannon Saccocia, chief investment officer at Boston Private, exercising just the right amount of understatement.
Stock prices have soared because investors have no where else to go.
Money market funds? Managers have been forced to waive fees to keep interest rates from falling below zero. Government bonds? The yield on the benchmark 10-year Treasury is 0.6 percent, which isn’t even enough to keep up with inflation, not to mention save enough for college or retirement.
It’s called TINA — there is no alternative. Stocks are the only game in town. And they’ve been a great game since March 23.
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That’s when the Federal Reserve said it would do whatever was necessary to stabilize markets and make sure there was enough money available to keep businesses and consumers afloat. The central bank cut its benchmark interest rate to near zero; propped up the markets for debt issued by the Treasury, municipalities, and corporations; and set up a lending facility for small and mid-size businesses.
With its announcement, Fed chairman Jerome Powell essentially told investors, “Don’t worry. We got this.” And they took him at his word.
Thursday’s blowout nicked some of the market’s gains, but the scorecard is still impressive: Since its low, the S&P 500 is up 54 percent, while the Nasdaq has soared 67 percent.
There was no one event that precipitated Thursday’s decline. The new jobless claims figures continued a downward trend, but one at levels not seen in generations. The economy has a long way to go before recouping this spring’s losses.
Investors have been growing increasingly concerned, however, that the big tech stocks driving the rally — the so-called FAANG stocks, for Facebook, Amazon, Apple, Netflix, and Google ― had risen too far, too fast.
Apple soared 134 percent from March 23 through Wednesday. Facebook was up 104 percent. And Amazon had gained 86 percent. On Thursday, Apple shed 8 percent, while Facebook lost 3.7 percent, and Amazon fell 4.6 percent.
But that’s nothing compared with Tesla. After a gravity-defying ascent of 590 percent from its March low through Monday, the stock has shed nearly one-fifth its value, including 9 percent on Thursday. Investors started selling on news that the company’s largest shareholder, after chief executive Elon Musk, had reduced its stake, and that Tesla planned to sell $5 billion of new shares.
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To get a sense of how narrow the rally has been, consider this: The S&P 500, an index whose members are weighted by their market value, has advanced 6.9 percent this year, driven by gains among high market-cap stocks such as Apple. But when all the companies in the index are weighted equally, it has lost 3.8 percent.
In other words, if all 500 stocks in the index contributed equally to its moves in either direction, the benchmark would be in the red.
Despite the tech-led takedown, the market isn’t headed for a dot-com-like bust, said Dec Mullarkey, managing director at SLC Management in Wellesley.
The FAANGs and other established tech companies have “fortress balance sheets and sustainable cash flow,” Mullarkey said. “They are not as mis-priced as most headlines suggest.”
Still, Mullarkey and other market analysts cited four key factors that may determine the course of the market through the end of the year and beyond.
1. Whether Congress and the White House can agree on a new financial rescue package. Companies have blown through their forgivable government loans, consumers have spent or saved their stimulus checks, and those who have lost their jobs saw their unemployment benefits cut substantially with the expiration in July of the $600 a week in extra cash from the feds.
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2. Can the country get the coronavirus under control and roll out a vaccine? “Markets are assuming that there will be resolution on the health side by Q1 or Q2 of next year,” Mullarkey said.
3. The direction of US-China trade relations. One headline that may have rattled investors on Thursday: China plans an aggressive effort to develop its semiconductor industry. Investors are worried that US tech companies will be hurt if Washington and Beijing establish what would essentially be two distinct tech worlds involving the Internet, semiconductors, mobile phone networks, and more.
4. The November election. Despite President Trump’s claims to the contrary, investors won’t bail out of the stock market if former vice president Joe Biden defeats him. Rather, their concern is an election marred by foreign meddling and claims of voter fraud.
Wall Street has survived many crises since traders first gathered under a buttonwood tree in Lower Manhattan to buy and sell stocks in 1792.
And it will be tested again this fall.