A look at the state of the stock market a year after its pre-Covid peak

For all the unprecedented events and unforeseen consequences of last year, market conditions today rhyme quite closely with those of mid-February 2020, when stocks peaked just before the collapse of Covid.

In the six months leading up to the February 19, 2020 index, the S&P 500 gained 15.8% to a new all-time high. Today, the index has risen 15.9% in the last six months and clicked for new records for most of this period.

Much of the discussion around the market is also similar: worries that too much market is dominated by a few huge growth stocks (the top five S&P shares were 20% of the index back then and are 22% today) and investor sentiment she may have become too pleased.

Then, as now, S&P has been at a 20-year high in terms of valuation, with the price-to-earnings ratio exceeding only 19 and now exceeding 22 – yet for those who choose to compare the return on equity with Treasury yields, the difference is quite close: 3.7 percentage points then compared to 3.3 now.

The high-yield bond spread has made an almost perfect round-trip in the last year, reaching even extreme lows, which fits in with the sense that generous credit markets lubricate the economy and markets.

Here is how this equity support from the forgiving debt capital markets was characterized in this column a year ago this weekend:

“The real yields of corporate bonds of investment quality are just above zero. The Fed’s Chicago National Index of Financial Conditions shows that the liquidity fund is as weak as it was in this cycle … A clear majority of S&P 500 shares have dividend yields that exceed 10 years Treasury yield. Although there is no perfect relative value indicator, it tends to provide a buffer under the valuation of equity. “

All this is true today. So is the feverish buying of a series of expensive “stocks” that excite younger and more aggressive investors, while making traditionalists a little nervous.

A year ago: “A group of stocks that could be called“ idiosyncratic speculative rises ”is also acting quite strangely this year, a sign that investors are aggressively understanding the next big thing (or maybe just the next quick dollar). ” Then there were Tesla, Beyond Meat and Virgin Galactic. Today, there are dozens of names, from GameStop to Canadian cannabis, to fuel cells for early-stage fintech applications.

So the echoes are pretty clear as this anniversary approaches. However, the differences are many, important and make the current market more dynamic in favorable and – potentially, possibly – dangerous ways.

Let’s be clear that the observation of a similar structure in the market now is not remote to predict something like a repeat of the collapse of the market and the economic calamity that began to take place at the end of February last year. The spread of the coronavirus was a real external shock, the forced global economic shutdown, the first free fall in five weeks – 35% unprecedented.

Which brings us to some of the most important differences between now and a year ago. The collapse has reset the clock on the economic cycle and on political positions. From 2019 to 2020, Wall Street was caught in a late cycle wake, the economy being close to peak employment, the Treasury yield curve fixed, corporate profit margins close to peak, earnings expected to be flat.

The Fed has been waiting indefinitely in February 2020, with short rates at 1.5-1.75%, but a significant minority of Fed officials projected a rate hike in 2021.

The lightning recession and the collapse of profit led to a deficit-financed fiscal support of about $ 5 trillion, with a higher probability, and turned the Fed slightly higher for a long time, intending to wait for a return to full employment and sustainable growth. inflation before making any tightening move.

So, yes, the ratings are higher now and investors’ expectations may become unrealistic.

But Corporate America has been refinanced for years to come at low invitation rates from a Fed backstop, earnings will return to their previous peak this year, the government is eager to put the economy at ease, and (probably) policymakers have just executed a lawsuit. repeatable -circuiting a recession.

Another way things have changed in a year is the strong rush of smaller investors in the market, who feel invincible after going through a crash and recording a return of almost 80% in the S&P 500.

Investors’ desire to participate in positive upward bets in the form of options to buy in unprecedented volumes and the instant increase of new IPOs, such as DoorDash, Snowflake and AirBNB, to the market value of tens of billions in revenue huge a new atmosphere more aggressive and more risk tolerant for the gang.

Some of this energy had already begun to flow a year ago, but it had not gained nearly as much momentum or gained as much viral character. The Russell Micro-Cap index rose 65% in 3 and a half months. The volume of penny stocks increased fivefold in the same period. The overall volume of transactions increases even with the increase of indices – the reverse of the typical pattern and returning to a similar pattern since the late ’90s. Last week’s stock inflows set a new record.

The stamps on social media took over GameStop shares from $ 12 to $ 400 back to $ 52 in the past two months, and then rolled Tilray from $ 18 to $ 63 back to $ 29 in two weeks. Meanwhile, S&P 500 ETF volumes have plummeted to several-year lows, apparently not thin enough for the marginal buyer.

The whole litany that describes the untamed animal spirits that cross Wall Street says that this is a strong and well-sponsored bull market, and that there is a risk of overtaking wildlife. Again, everyone is aware that they have been building and sounding alarms for a while.

Does the fact that the subsectors of Reddit stocks and faddish green energy games become exaggerated and then perforated without undermining the capitalized clues say they are not dangerous? Or the fact that a few days of buying from the end in small short press stocks at the end of last month triggered a rapid leak of 4% S&P 500 a warning that irregular tremors can not always be safely dissipated by the market foundation?

A year ago, Bank of America global strategist Michael Hartnett told investors to continue to play risky assets until investors grow more clearly “euphoric,” which is expected to mark the moment of maximum positioning and of maximum liquidity “.” Hartnett claims that the same watch now, its Bull & Bear Indicator correctly keeping investors involved, but reaching a contrary selling threshold (which preceded corrections in the past and was last hit in early 2018).

All this goes back to the idea spread here in early January that 2021 presents itself as a new mix of 2010 and 1999 – the first full year of a new bull market that has long-lasting recovery forces, mixed with the last year of a strong bull. a market that exploded through every positive target and created levels of excess that took several years to function.

Interestingly, the core of the market captured by the S&P 500 is the metabolism of this mixture with a fairly constant and well-behaved upward trend – it could even be said to be boring. At least for now.

Starting next week, Mike Santoli’s columns will only be available on CNBC Pro.