The recovery from one of history’s sharpest stock market crashes in March has in many ways been more remarkable than the fall.
This week the S&P 500 joined the Nasdaq in both reaching a new all-time high less than five months after posting their pandemic lows.
It was obvious pretty quickly that the pandemic would force many businesses to shut down completely and cost huge numbers of jobs. Markets fast reflected that economic damage during mid-March.
The recovery from one of history’s sharpest stock market crashes in March has been unlike anything seen before
It always seemed the recovery from that would be unlike anything we’ve seen before simply because the cause of the crash, a pandemic caused by a novel virus, was unique.
There was of course the 1918 Spanish Flu pandemic but the world and the stock market were unrecognisable then as compared with now.
Those expecting a quick fall back to earth for the S&P 500 and Nasdaq could be disappointed.
Former ECB boss Mario Draghi coined the phrase ‘whatever it takes’ when he was trying to stop the euro from disintegrating in 2012.
Jerome Powell and his Federal Reserve colleagues seem to have their own version of whatever it takes. Not to save the dollar. It is not in imminent danger, although vast QE can weaken it over time.
Powell is seemingly doing whatever it takes to keep the stock market climbing.
There has been talk of ‘inflated’, ‘unrealistic’ or even ‘fake’ valuations for some of the big tech stocks that have led the rally.
The reality is that there is no such thing with large listed companies. Descriptions like that are all just subjective opinions. Even earnings multiple models which form the basis of traditional valuation methods incorporate the personal views of analysts.
The only way a listed firm can be valued in pure terms is by multiplying the last price somebody willingly paid for a share in it by the number of shares issued. It really is that simple. Do that for Apple, and the number you now get is north of $2trillion.
That is not to say prices won’t dramatically fall at some point in the future. If the facts investors are confronted with change, which they inevitably will, the price somebody is willing to pay for a particular share will change.
This week the S&P 500 joined the Nasdaq in posting new all-time highs
As it stands now though, investors are confident the Fed will keep pumping cash into the system for a significant period of time into the future, and that this cash must and will find its way into the stock market.
Investors are also collectively taking a second bet. Namely, that there will be no meaningful regulatory backlash against the big tech firms in the near term.
Here lies the major risk for the seemingly unstoppable Apple, Amazon, Google, Facebook and co.
It is very difficult to see their market positions being upended through the natural wear and tear of doing business.
If anything, the lockdown has strengthened their hand rather than weakened it, and there is no sign of them becoming less intertwined in our lives.
The rush among retail investors to put their money into the companies they know well and whose offerings they use on a daily basis is also a long-term wind in their sails.
Investors are confident the Federal Reserve will keep pumping cash into the US stock market for some time to come
The only thing that could shake them from their lofty perch is a heavy handed intervention from the US government, and to a lesser extent the EU and Britain.
In the US there are rumblings of this, which were given more weight as the CEOs of these firms were dragged before a hostile Congress last month.
Nothing will happen before the US election in November though, so investors can rest easy and reassess after the votes are cast.
Action from the EU looks likely to take the form of more hefty fines rather than anything that fundamentally changes how the tech firms do business. Although this could change, nothing happens quickly in the halls of Brussels and Strasbourg.
Of course the wild card of the pandemic taking an unexpected turn or another ‘black swan’ event occurring should be kept in mind as a possibility.
There is no such thing as risk-free investing, even in the case of Apple shares.