New Market Records, Same Story — Just More Levered Up

The U.S. stock market is back at all-time highs. Naturally, there will be cynics and naysayers about the incredible rally off the March low – and indeed, we do live in odd times. The stock market at a record, with unemployment the worst since the Great Depression. By now, investors hopefully understand that the raw economic numbers just don’t bring the same implications that textbooks suggest.

There is a giant band-aid in the form of a monetary and fiscal stimulus protecting Americans from the worst of the real impact of the COVID lockdown. While that’s been the most important force in keeping things together — and the one that gets the most credit for supporting equities — it’s crucial to realize that the stock market’s full retracement is also a function of the surprising resilience of the U.S. consumer and the power of technology to enable life to function somewhat normally during this period. At the same time, dozens of companies are working on large-scale vaccine trials with promising indications. Economic data in the U.S. has shocked economists for five months straight. COVID curves that flared up outside the initial hot-spots are now on their way down. There are real, good things happening that have changed from March to justify stocks reversing.

One can see this in the way leadership has ebbed and flowed throughout the past six months. On net, it’s been a story about big tech dragging the market forward: yesterday’s new highs came on weak breadth, low volume and lots of laggards. The Nasdaq NDAQ is up 63% since March 23, compared to 60% for small caps and 52% in the S&P 500. But there have been two periods in which the relative strength of the Nasdaq declined next to the Russell 2000, and cyclical value stocks outperformed growth companies: from mid-May through the first week of June, and the past month going back to June 9. This week, though, the market didn’t seem to care much about declining U.S. COVID curves, as Nasdaq momentum trades and quarantine winners crushed assets more directly tied to the economy.

The stock market’s steady climb supports the notion that the legacy of this particular crisis will be less about peoples’ economic experience in the moment of quarantine than it will be the ramifications of policy enacted during the period. It remains difficult to know the implications of what we just did: inducing Depression-like symptoms to avoid a real one, but there almost certainly will be side effects.

In the meantime, it looks mostly like business as usual: Americans buying lots of stuff, new market highs led by big familiar tech stocks, and aided by a generous central bank — just all in a more extreme form.

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