Investors and traders who held their nerve and stayed in the Standard & Poor’s 500 index during the horrors of 2020 can pat themselves on the back.
While all shares took a battering last year from the impact of the coronavirus and of official attempts to bring it under control, the S&P 500 has not only regained lost ground but is now trading higher than it was 12 months ago.
Currently, the index is at 3,876.50. One month ago, on 22 January, it stood at 3,841.47, and three months back, on 23 November, it changed hands at 3,577.59.
Trillions in new money
On the eve of the full impact of the coronavirus crisis, on 24 February 2020, it stood at 3,225.89.
Momentum still seems strongly upwards, with the three-monthly low being represented by the 23 November figure and the three-monthly high being seen as recently as 12 February, at 3,934.83.
The S&P 500 is more broadly-based than the venerable 30-stock Dow Jones index, and contains some of the greatest names in US industry. These include tech giants Apple and Amazon, financial services groups JP Morgan and Visa, along with Walt Disney and McDonald’s.
But there is no doubt that asset prices have been greatly lifted by the “quantitative easing” (QE) money-creation policies of the US central bank, the Federal Reserve. Such action started in the wake of the 2008 financial crisis, and the total created this way had reached $4.3 trillion by March last year.
As a response to the coronavirus crisis, the Fed embarked on further QE measures last year, and by November the total created in this way had risen to $7.2 trillion. The key US interest rate is in a target range of 0% to 0.25%.
“Profits have gone nowhere”
In theory, QE stimulates economic activity by nailing borrowing costs to the floor and releasing funds into the system that, it is hoped, will be either spent or invested in job-creating businesses. But with returns on paper assets so poor, much of the new money is funnelled into shares, real estate and other speculative investments.
This has the side effect of lowering the returns on stocks, because the higher the price of shares, the lower the dividends in relation to that price. New President Joe Biden is thought likely to continue with the easy-money policies for now, but those with long memories will recall that leaders of the Democratic Party have tended to be tugged back towards economic orthodoxy when in office, as happened with Jimmy Carter (1977-1981) and Bill Clinton (1993-2001).
If the curtailing of loose monetary policy is one threat to the booming stock market, another may be the stagnation of corporate profits. Dhaval Joshi, analyst at independent research firm BCA, has written that: “The core tenet is that the stock market goes up because profits go up. This tenet is under threat because, since 2008, the global stock market has nearly doubled while profits have gone nowhere.”