Sometimes the “why” is less important than the “what.” And that’s particularly true for investors right now.
Try explaining this: The Dow Jones Industrial Average advanced 904.09 points, or 3.3%, to 28,586.90 this past week, its second consecutive weekly gain, while the S&P 500 index rose 3.8%, to 3477.13, and the Nasdaq Composite gained 4.6%, to 11,579.94. Even more shocking, the small-company Russell 2000 index climbed 6.4%, to 1637.55.
A possible stimulus package got much of the credit—and attention—this week, and there’s no doubt that the market would love to see a bill get passed. The Federal Reserve would too, as Fed Chairman Jerome Powell continued to call for the government to act sooner rather than later. But if it was all about stimulus, we suspect that the swings to the downside would have been larger when President Donald Trump said he was calling off negotiations, and the market wouldn’t simply have shrugged off every other misstep along the way.
Another possibility for the rapidly rising market: It’s looking ahead to a Blue Wave, which would see not only Joe Biden win the election, but Democrats hold the House of Representatives and take the Senate too. In that case, the stimulus might be even larger than a package now would be.
Jefferies economist Aneta Markowska, for instance, removed a stimulus package from her 2020 forecast two weeks ago and still doesn’t expect it to become law this year. She does, however, suspect that if the Democrats sweep, they will seek to pass the original $3.4 trillion Heroes Act that cleared the House in May. “Even assuming a very small fiscal multiplier, the boost to 2021 growth would be significant,” Markowska writes.
While the Blue Wave narrative has picked up speed, it isn’t reflected everywhere in the market just yet. For instance, Wells Fargo Securities strategist Chris Harvey notes that bank stocks have been rallying, even as the odds of a win by Biden, who would likely tighten regulation, increase. “To us, these remain highly unusual and uncertain times,” Harvey writes.
More-promising Covid treatments might be a better way to explain the market’s gains. The week, after all, saw further evidence that Gilead Sciences ’ (ticker: GILD) remdesivir helps treat Covid, while Eli Lilly (LLY) announced its coronavirus cocktail had begun Phase 2 trials. Then there was Regeneron Pharmaceuticals ’ (REGN) experimental treatment, which apparently helped the president recover and was being considered for an emergency-use exemption by the Food and Drug Administration. “If the trajectory seen by President Trump (from at risk of serious illness to all better in less than a week) becomes standard of care in, say, four to six months, then life can get back much closer to normal,” writes Stephen Stanley, chief economist at Amherst Pierpont Securities.
Why the market is going higher might be less important than how it’s rising. It wasn’t that long ago that everyone was worried because big tech stocks like Apple (AAPL) and the other FAANGs were leading the market higher, while everything else sat out. Megacap strength was taken as a sign of that investors were playing defense, making the rally suspect in the process. Now, most stocks are participating. Need proof? The Invesco S&P 500 Equal Weight exchange-traded fund (RSP) has risen more than 13% during the past three months, outpacing the SPDR S&P 500 ETF’s (SPY) 10% rise during the same period. It isn’t just Apple.
In fact, the market rally has broadened out so much that future gains look likely, if history is a judge. The reason? The S&P 500 just experienced a “breadth thrust,” the term used to describe a 10-day period in which advancing stocks outnumbered decliners by at least 2-to-1. That doesn’t happen very often—just 29 times since 1990—and it signals massive buying pressure in the market, according to Keith Lerner, chief market strategist at SunTrust Advisory Services. When a breadth thrust occurs, the S&P 500 has been higher 12 months later 96% of the time for an average gain of 13%.
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Of course, higher in a year is very different than higher next week. While breadth thrusts point to a higher market in the future, they’re often followed by short-term drops. The last one, for instance, occurred on June 5, when May’s payrolls data showed a massive increase in the number of jobs that the U.S. economy had added. The market peaked one day later, and then the S&P 500 dropped 7% over just three days. Still, even including that drop, the index has gained 8.8% since then.
The takeaway: Dips are to be bought. “The market is not going straight up,” Lerner says. “But bull market rules apply.”
Write to Ben Levisohn at Ben.Levisohn@barrons.com