No Longer Standard or Poor: The S&P 500 hits record high

August 30, 2020

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2 min read

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What's going on here?

The US stock index the S&P 500 hit a record high on August 18th despite the ongoing economic impact of the coronavirus pandemic.

What does this mean?

The now possibly ironically named Standard & Poor’s 500 is Wall Street’s benchmark index. This meant that other US stock indices such as the Nasdaq and Dow Jones also rebounded. This rebound comes after a turbulent period for the stock market which saw a 33% drop. Many saw a quick recovery as unlikely and still think this rebound is surprising, but the markers have now fully recovered from coronavirus losses. The rebound is being driven in part by US tech companies listed on the S&P like Amazon, Apple and Microsoft. Apple has seen its market valuation hit $2 trn in recent days.  But analysts think the main reason for the rebound is that investors expected the US Federal Reserve to inject more money into the world’s largest economy. However, a statement from the Federal Reserve stated the “US economy was still a hostage to the virus.” This led to a drop of 0.5% on the S&P two days after the Federal Reserve announced it was unwilling to deploy emergency economic measures.

What's the big picture effect?

There seems to be a huge disconnect between Wall Street and Main Street (nicknames for the stock markets and the US general economy). This is evident in the news that the number of people seeking employment benefit claims climbed back to over one million. This means that the US economy is suffering its worst economic slump in 70 years due to the effects of the coronavirus crisis. Alongside the economic uncertainty created by the global pandemic, there are also geopolitical tensions created by the Sino-American relations. 

But there is a market disconnect even within the S&P itself. Out of the 500 companies in the index, over half are still trading lower than before the pandemic began. Stocks for Big Tech are making the gains and could mean the rebound is built on unstable foundations. Investors buying up only one type of stock has substantial risk. This is because the lack of diversity means if that type of company fails an investor could lose everything.  The Dot-Com Bubble of the late 1990s is an excellent example of this.

The jubilant US markets have not been matched by its international counterparts. The FTSE 100 is still down 19% down since the year’s start, as is the German Dax down 2.8% and the French CAC40 down 17.4%.  Stock markets are usually an indicator of a country’s economic strengths. In the US, the disconnect between the stock markets and economic reality is stark. Market moods can shift suddenly and are already starting to look gloomy. There is hope for global economic recovery, but for now, the stock markets may have jumped the gun.

Report written by Michael Johnson

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