By Chuck Mikolajczak and Stephen Culp
NEW YORK (Reuters) – The dizziness on Wall Street in recent weeks contrasts sharply with the pandemic panic of a year ago.
U.S. stocks will mark the market lows’ one-year anniversary on Tuesday as the spread of COVID-19 and government lockdown began to slow economic activity before massive government and central bank stimulus and vaccine development at an astounding, albeit astonishing, rate uneven development, ricochet off.
As investor optimism grew, stocks rebounded from the sell-off that ended an 11-year bull market, the longest in history.
The S&P 500 closed at 2237.40 on March 23, and hit the bull market high of February 19, 2020 on August 18, 2020 when the index ended the session at 3389.78. That high marked the end of the shortest bear market ever and confirmed that a new bull had been released on March 23rd.
GRAPHIC: One year before the low – https://fingfx.thomsonreuters.com/gfx/mkt/yzdvxeqxepx/Pasted%20image%201616085068348.png
Initial lockdowns hit the customer-facing service sectors the hardest as social distancing mandates curb the spread of shuttered COVID restaurants and criticize the travel and leisure industries.
Jobs in these sectors – usually at the lower end of the pay scale – evaporated overnight, and as the number of new coronavirus infections rose and fell, these jobs were slow to return.
Conversely, the shutdown caused consumer demand to shift from services to goods, increasing the resilience of US factories and causing the restoration of manufacturing jobs that surpassed the whole.
GRAPHIC: Payrolls during COVID – https://graphics.reuters.com/USA-STOCKS/jbyvraxoype/payrollscovid.png
Along with stimulus from the Federal Reserve and the government, stocks have moved off the lows thanks to the start of vaccines rollout and optimism that economic reopenings are on the horizon, among other things.
However, companies like Amazon, Zoom Media and Teladoc, which had attracted attention at the beginning of the pandemic, so-called “stay-at-home” games, saw their fate turn in the latter stages of 2020 with cyclical sectors like energy started. Small capitalization materials and stocks are gaining favor.
GRAPH: Breakdown of stock performance versus March lows – https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzgkkgvw/Pasted%20image%201616091020558.png
As optimism about the reopening grew, so did investors’ appetites for stocks, which traditionally do well as an economy rebounds from a recession. Many of these stocks fall into a “value” profile as they have been largely ignored for larger “growth” names in sectors such as technology and communications services.
This change in tenor helped value stocks fill a widening gap from the outperformance of growth stocks in recent years.
CHART: Growth versus performance since the March low – https://fingfx.thomsonreuters.com/gfx/mkt/jbyprammzve/Pasted%20image%201616093607809.png
The uncertainty about the medium or long-term prognosis for recovery created several pivots between staying at home and reopening.
For example, the stock market looked beyond current conditions to an expected recovery in commercial aviation, which is evident from comparing air traffic data to airline stocks. Investors can clearly see that the ailing sector is gaining momentum thanks to the Transportation Safety Administration (TSA) despite persistently low passenger numbers.
GRAPHIC: TSA throughput – https://graphics.reuters.com/USA-STOCKS/azgpodjwdvd/tsa.png
The real estate market was the star of the US economic recovery, rebounding beyond pre-pandemic levels as the hunt for lower population densities and home office space, coupled with historically low mortgage rates, spiked demand and rose property prices and the supply of homes rose to all-time lows.
Real estate stocks have also significantly outperformed the broader market since its low point. A year later, the Philadelphia SE Housing Index rose nearly 150%, almost twice as fast as the S&P 500 over the same period.
The strength of the sector is also a reminder of who has suffered the worst economic downturn since the Great Depression, as lower-income Americans tend to rent and are less likely to be potential home buyers.
GRAPHIC: Housing Market – https://graphics.reuters.com/USA-STOCKS/xlbvgxwrkpq/housing.png
Equities also benefited from what has been referred to as “TINA” or “there is no alternative” as the Fed’s loose monetary policy kept government bond yields historically low, which also pushed mortgage rates to their lowest record. The benchmark’s 10-year US Treasury note yield was below the dividend yield of the S&P 500 for some time.
That has changed in recent weeks, however, as expectations of a rapidly improving economy have also raised inflation concerns and potentially hurt the attractiveness of stocks if yields continue to rise.
GRAPHIC: S&P dividend yield versus 10-year treasury – https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgxjwrvq/Pasted%20image%201616094978342.png
The rapid rise in interest rates last month has also weighed on the highly valued growth names as interest rates could hurt future earnings. That weighed on Nasdaq, which includes mega-cap growth names like Apple and Alphabet, as well as Microsoft.
CHART: Nasdaq and tech stock performance versus 10 years – https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdbjxwpo/Pasted%20image%201616095730928.png
(Reporting by Chuck Mikolajczak and Stephen Culp; Editing by Alden Bentley and Cynthia Osterman)