The S&P500 – and US equities in general – made 3 big channel moves since the early 2000s. The 10-year rally after the 2008 financial crisis was mainly driven not necessarily by fundamentals & a stellar US economy, but rather by the abundance of easy money (the “New Normal”) and stock buybacks. Low interest rates had greatly encouraged and facilitated leverage & risk – so much so, that by most metrics the index had consistently looked overvalued.
It was always unavoidable that fundamentals would eventually catch up and this was evident in late 2018. The general trend of earnings misses & general underperformance had seen the S&P slowly continue its grind higher in 2016 & 2017. The previous years were dominated by corporates financing equity buybacks by issuing low-coupon debt; this is certainly not the sign of a healthy equity market. Having said that, the slow but steady rally had been destroying shorts since 2009 so it was always difficult to go against this momentum. It’s also worth noting that the consistent US deficit and steadily increasing money/credit supply is in itself a natural driver of higher equity prices; 2009 coincided with the start of the massive US balance sheet expansion.
The S&P500 index made a brief bear move in 2018 – driven by rising yields – but yields reversed and the index continued to new ATHs. The Covid-19 outbreak was finally the trigger for a proper bear-market leg lower in Q1 2020, and the move was sharp & violent. The extensive lockdown and drop in demand translates into plunging economic activity and lower equity levels. A 30% drop from the highs was enough for central banks to embark on the largest stimulus mission in history.
There are still many sources of uncertainty in the world, but equity markets seem to be shrugging them off without a second thought. The unprecedented global stimulus is reason enough to be bullish, but at these extremely rich valuations it’s difficult to be long. If you missed the Covid-induced crash, the prudent thing is to probably wait for another proper pullback before getting long – but will it come?