The S&P 500 advances, but does not chase away volatility

15/09/2021 – 13:32

The Nasdaq hits its nth record in 2021; the S&P 500, too … These brands already seem so natural that we have stopped counting them. Most investors may hate the 2021 rally, but that hasn’t stopped the markets from continuing to rise.

As of the night before I wrote this article, the S&P 500 posted an increase of more than 20% from early 2021, 18.4% more than last year’s performance. In addition, its greatest reduction from maximum to minimum was only 4%, when in 2020 it lost 34% in a few weeks due to the Covid-19 crisis.

2021 has also been a “healthier” increase than in 2020, because the market has been supported by various sectors and not just by the tech giants. Finance has increased, ahead of real estate and communications services. Technology ranks fifth in terms of performance among the 11 sectors of the S&P 500. In 2020, the energy sector lost almost 18%, while this year the lowest gain is almost 7% for consumer staples. Which, let’s admit, is not catastrophic.

70% of S&P 500 companies have risen at least 10% during the year

More interesting still, the weight of the Faangm (Facebook, Amazon, Apple, Netflix, Google -Alphabet- and Microsoft) in the S&P 500 has even begun to stabilize in 2021. 70% of the companies in the S&P 500 have risen at least 10% during the year, with Moderna leading the way with gains of more than 250%.

Can the indices go up even higher? It is not unreasonable to think about it. A 20% increase for the S&P 500 over 12 months is not extraordinary. In fact, the United States stock market has grown 20% or more in 34 of the last 95 years (36% of the time) and has declined 25 times (26% of the time) in those 95 years. Historically, then, you are more likely to experience a 20% gain in a given year in the US stock market than a loss.

It is also advisable to be wary of the comparisons that will surely proliferate in the coming months. More and more analysts are making contextual comparisons with 1987, but the circumstances were totally different then (doubling of general indebtedness since the late 1970s with huge influx of liquidity; brutal fluctuations of the dollar in the mid-1980s in the system). exchange rate; the portfolio insurance mechanism, very popular at the time, designed to reduce risk and whose widespread use made it a depraved system; automated buying and selling of shares, relatively new at the time, which increased and accelerate the fall of prices).

Today the dollar is stable, circuit breakers have been installed, and central banks have completely eliminated systemic risk. But for the indices to continue rising, two short-term risks must be avoided: the evolution of new variants of the coronavirus (very much to take into account the situation in emerging countries) and a monetary policy error by the Fed: losing control inflation is the worst possible situation for a central bank.

In fact, it is better to be ahead than behind in the money cycle. In other words, announcing the start of a decline in asset purchases just before mandates from the Fed (or another central bank) are fulfilled is less damaging than triggering a gradual decline just after mandates are met. The pace of future US monetary normalization will be the real key to the direction of the markets in the coming months.

The continuous progression of the indices will thus depend on several factors, but especially on the economic impacts of the spread of Covid-19 variants and the pace of reduction of asset purchases by the Fed.

The S&P 500 has passed my target of 4,500. The US central bank is likely to take a dovish stance at its next meeting on September 21-22, which could push the US index to 4,800 before the end of the year. However, volatility could reappear, as well as the debate about the future of the ECB’s Pandemic Emergency Purchase Program (PEPP) in Europe.

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