S&P 500 hits all time high – are we really going into a bull market again?

Have we turned a corner? That’s the question that everybody is asking in the United States but yet is not on the lips of even one investor in the UK. So what’s going on and why such a large disconnect between two economies which in the past have always moved so closely together?

Certainly in the States it appears that once again the risk appetite is back. The S&P 500 has hit the all-time high achieved back in February. This was on the back of the occasional encouraging economic release, hopes of new coronavirus relief package, and positive noises surrounding a vaccine. Investors were also weighing more tensions between China and the US against a glimmer of progress in talks between Democrats and Republicans over another coronavirus fiscal aid package. Millions are out of work due to the business closures resulting from the pandemic, but you would not know that from the equity markets.

A temporary rotation out of the high-flying technology stocks into value and cyclical counters was also initially taken as a positive signal. Investors moved towards beaten-down stocks in sectors that only stand to gain if an economic recovery is truly underway. It’s unclear as to whether investor interest in this space was transitory or reflected a more enduring transition. Nonetheless, it was clear that the runaway technology sector was due a pause. Still, that didn’t stop its stocks from once again resuming their trajectory.

The weighting of the technology sector is by far the largest in the S&P 500, growing from 24.78% at the end of 2019 to over 27.60%. Other highfliers often mentioned in the same breath as technology companies include Facebook and Netflix within the communication services sector, and Amazon and Tesla within consumer discretionary. They may be dominant weights within the market, but those companies are not technology stocks by S&P 500’s categorisation. In other words, “technology” has an even bigger influence on the market than often acknowledged.

S&P weighting and share of earnings of the ‘Big 5’

 

The consumer discretionary sector, meanwhile, has climbed in weighting to 11.10% from 9.89%, while industrials have retreated to 8.07% from 8.89%. Investors had pointed out that a recent pullback in technology companies has given greater scope for other sectors of the market to rise, providing a necessary widening out of the market’s breadth. But that hasn’t stopped the technology-heavy Nasdaq once again setting a fresh record close.

The rebound we have seen in the market not only represents stocks coming full circle in the span of nearly six months but also the official end to the bear market.

When you look at Europe, there are mixed signals. New spikes in the coronavirus pandemic have raised concerns that the region may see a return to partial or total lockdowns. But a string of economic indicators was enough for investors to become more confident about an evolving recovery.

 

In Germany, investor sentiment as calculated by the Sentix group rose for the fourth consecutive month, and came in ahead of expectations. Sentiment rebounded faster than in other European Union countries. In France, the central bank said that economic activity in July ran 7% below the level it would have performed without the pandemic but added that the recovery was on track. The decline in UK economic activity in the second quarter was the worst of any major European economy during the pandemic. GDP plunged an annualised 20.4%, double the hit taken by Germany and signalled the country’s first recession in 11 years. Yet, the figure was better than economists’ expectations of a 21.2% decline.

 

We can expect investor and business sentiment to remain volatile in the coming months as fears rise, then recede, about the prospect of new lockdown measures. Nothing has been resolved. Concerns over an autumn pandemic wave should make investors uneasy. In this context, the behaviour of both investors and consumers will remain unpredictable.

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