Traders work on the trading floor of the New York Stock Exchange.
It’s the anniversary of the great decline: what has changed?
Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen testify to the House Financial Services Committee Tuesday on how the economic recovery from the Covid pandemic has developed.
Investors expect Powell to stick to the script for the next two years and repeat rates near zero. However, Powell and Yellen are also expected to be asked what, if anything, they learned about tackling the biggest crisis since the 2007-2009 Great Recession.
The all-time low a year ago
The S&P 500 bottomed out on March 23, 2020. From mid-February 2020 to that low point, the S&P fell 34%, the biggest drop since the Great Recession fell by 50%.
The big difference between now and then is the breathtaking speed of recovery. In the earlier crisis, the S&P did not return to its old high until February 2013, almost six years later. In the case of the Covid decline, the S&P returned to its February 2020 high six months later and is now up 75% from the low.
The Great Recession was, of course, a different type of disaster than Covid, but the speed of that recovery was staggering nonetheless.
What was responsible for the breathtaking recovery? Most traders cite the lessons the Fed learned from the earlier crisis.
“The Fed had a playbook from the last time [the financial crisis]They accelerated it and accelerated everything, “said Peter Cecchini of AlphaOmega Advisors.” You really grew up. “
Cecchini noted that the Fed launched a massive monetary stimulus package that cut interest rates to almost zero and revealed plans for massive asset purchases. “The biggest difference was in the primary and secondary credit facilities that interfered with the corporate bond market,” he said. “Even though they haven’t bought that much debt, the Fed said, ‘Corporate America, you can count on us. We’re not going to implode the corporate bond market.’ And that had a big impact on trust. “
Chris Murphy, co-head of derivatives strategy at Susquehanna, also attributed the science, which is usually not a factor in stock rallies: “The other good news is that this was a passing thing, depending on whether you got a vaccine while it was no one was sure how long the financial crisis would last. “
The Fed’s greatest success is in stocks
While all eleven sectors of the S&P are well below the March 2020 lows, the sectors that benefit most directly from the Fed and Congress are the biggest drivers: small caps, commodities, and cyclical sectors like transportation and industrials, whatever has formed known as the “reflation trade”.
Important sectors since the low point: reflation rules (since March 23, 2020)
- Russell up 126% in 2000
- Transports increased by 108%
- Banks up 107%
- Materials up 93%
- Energy increased by 91%
- Industrials up 90%
While technology has also done well (up 85%), consumer sectors have left the reflation trading strong behind as these stocks benefit less from the reopening of the economy.
Defensive sectors lag behind recovery (from 3/23/2020 low)
- Health care up 47%
- Consumer staples up 32%
- Utilities up 30%
What investors are really invested in: rapid change
However, looking at the returns since the bottom shows an even bigger trade than reflation. Let’s call it the “Rapid Change Trade”.
Investments in clean energy, online retail, lithium / battery, 3D printing and cybersecurity have skyrocketed in the last year.
Trading with the “rapid change”? (from 03/23/2020 low)
- Clean energy (PBW) up 324%
- Online trading (IBUY) up 303%
- ARK Innovation (ARKK) up 231%
- Lithium / Battery (LIT) up 217%
- 3D printing (PRNT) up 166%
“Investors are counting on Covid to accelerate a technological transformation of the home and workplace. So investing in change is definitely an issue,” said Murphy.
Still, it seems a bit strange. You have the old school energy, brick and mortar and industry all bouncing back, and at the same time you have the high tech, more speculative rapid change trade.
Can you have both “Over time, one will prevail over the other, but right now the situation is such that there is room for both,” said Steve Sosnick of Interactive Brokers. “Think of all of the new investors who came into the market last year. The new money went into this thematic technology. That is exactly what happened in the late 1990s: a whole new group of investors came in looking into technology The old school investors are uncomfortable chasing this trend. “
Still, it seems like a safe bet for Jim Besaw, Chief Investment Officer at GenTrust, to bet on acceleration. He is one of many observers who find that the pace of change, the pace of trade, and the pace of everything have accelerated over the past year: “Anything that we previously thought would take months would now happen in a few days / hours. “
Yellen and Powell
What will Powell and Yellen say about the lessons learned from overcoming the Covid crisis?
While Sosnick expects a broad discussion on inequality and the K-shaped recovery, he also expects a clamorous defense to grow big with stimulus: “The Republicans who I think will argue will grow big were on Right at the beginning, but we really had to go. ” big ‘now, with this latest incentive, when we’re at the end rather than the beginning? “
Cecchini, who is writing a book on the fiscal and monetary response to the pandemic, hopes Congress will reverse the Fed’s increasingly aggressive behavior during these crises.
“There are situations where a coordinated fiscal and monetary response is required,” he said.
“But if you want to make such a coordinated effort in the future, Congress needs to be more explicitly involved. The Fed should be more closely monitored when it comes to such large, comprehensive programs.”